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Preliminary draft for discussion only ECONOMIC GROWTH AND SOCIAL WELFARE: EXPERIENCE OF THAILAND AFTER THE 1997 ECONOMIC CRISIS * By Medhi Krongkaew ** 1. Introduction In July 1997, Thailand became well known as the country that started a currency crisis that quickly spread to neighbouring countries in East Asia: Malaysia, Indonesia, Korea, Hong Kong, and to a lesser extent, Singapore and Taiwan. The contagion eventually spread across Asia to countries in other continents as well such as Russia and Brazil later in 1998 and 1999 . Many economic experts were quite embarrassed about this because, up until that time, they had had high praise for the way these East Asian economies had grown and developed. 1 These experts have since tried to understand the causes of this crisis and suggested ways to avoid the same crisis in the future. 2 This crisis has also brought about new ways of thinking about present and future development policies in Thailand, especially policies with respect to the dichotomy or trade-off between overall growth of the economy and overall welfare of the people. Undoubtedly, the crisis of 1997 has hurt or affected different people differently. Some were hurt more, some less, and some may even benefit from it. But one message from the crisis is clear: the government could not remain inactive and let different segments of the whole population face their own economic consequences. For those citizens in the financial sector who directly benefited from the booming economy and who were involved in causing the economy to collapse, the government should mete out some punishments so that they will be deterred from committing the same mistakes again. At the same time, the government should spearhead institutional and structural reforms that provide legal, economic and regulatory frameworks that help or facilitate economic governance in both public as well as private or corporate sectors to prevent similar crisis in the future, or to lessen the impact in case crisis is unavoidable. For those citizens who were less well-off, and usually victims of the crisis, the state should provide better protection against future economic calamities and a system of economic and social safety nets that cushions the fall of these people. The 1997 crisis has brought about concerns on these issues which have hitherto been neglected or ignored in the Thai modern economic history. And the current economic management in Thailand could be used as an interesting * Paper presented at the International Seminar on Promoting Growth and Welfare: the Role of Institutions and Structural Change in Asia, organised by UN Economic Commission for Latin America and the Caribbean, the Institute of Developing Economies, Japan, and the Instituto de Economia, Brazil, in Santiago, Chile, April 28-29, 2002, and Rio de Janiero, Brazil, May 2-3, 2002. ** Professor of Economics, Thammasat University, Bangkok, Thailand. 1 The best example is probably the World Bank report, The East Asian Miracle, which was published in 1993. The Asian Development Bank just published The Rising Asia just a few months before this economic meltdown which started in Thailand in July 1997. 2 See, for example, Ammar Siamwalla (2000), Medhi Krongkaew (2001), Somsak Tambunlertchai (1999), Sauwalak Kittiprapas (1999). 2 case study that shows the success or failure of how the government handles sustainable economic growth and social welfare. This paper is divided into 6 sections, including this Section 1: Introduction. In Section 2, I will recount the basic philosophy that lies beneath development policies of Thailand since the early 1960s when the Thai government launched its first national economic development plan in 1961. Section 2 analyses the impacts or effects of these policies on the social welfare of the Thai people, especially as seen through changes in poverty and income inequality. Section 3 discusses the pattern of growth and development that led to economic crisis in 1997, whereas Section 4 continues to discuss the ways the government solved the economic problems. Section 5 describes and evaluated economic policies of the present government that address both issues of economic growth and stability, and social protection and safety nets. Finally, Section 6 concludes with some important policy implications. It is hoped that the Thai experience could give a unique and interesting guideline to those who look for policy mix that helps generate satisfactory economic growth and sustainable social welfare at the same time. 2. Basic Philosophy of Thai Development Policies Box 1 describes the structure of the Thai economy in a nutshell. Together with Table 1, one can quickly learn about the basic development philosophy and policy of Thailand. Since its inception in 1961, Thailand’s National Economic (and later, Economic and Social) Development plan has played an important part in transforming Thailand from a poor, agrarian society to a middle-income newly industrialised country. The Thai government has done this through a combination of private economic investment and expansion, with the government providing infrastructure support and certain investment incentives. This is in keeping with the development thinking at the time when growth was the most obvious and probably the most important objective of economic development, and investment or capital formation is the most important means to that end. No doubt, plans after plans concentrated on growth and economic expansion (see Table 1). When growth slowed due to external and internal problems, the government would react to stabilise the economy so that growth returns in the shortest of time. Therefore, the development experience of the Thai economy during last three decade has seen alternate emphases on growth and stability, with occasional concerns on other areas such as poverty alleviation, income inequality, energy shortage and environmental degradation thrown in, but the growth orientation of the national economic and social development plan was never in doubt. Then in mid-1990s things began to change. As early as the Third Plan, the development philosophy and strategy of Thailand were already criticised for not paying sufficient attention to the problems of poverty and inequality, environment degradation, and social protection. In the 8th National Economic and Social Development Plan covering the period of development from 1997 to 2001 economic growth was no longer the final objective of the country’s development efforts. It was but one of the many factors that worked towards people’s development, and the development of people leads to enhancement of the capabilities of communities, society and ultimately of the nation. This development strategy is new for Thailand. The earlier emphasis on economic growth has changed. People will now be at the centre and development will revolve around them. 3 Unfortunately before this 8th Plan was put in operation, the crisis struck. As will be seen in more detail later, the whole 5 years of the 8th Plan were spent, not on achieving its intended goals and objectives, but on how to get the Thai economy out of the deepest recession in its modern history. At the end of the 8th Plan in 2001, the economy is said to have recovered and is strong enough to consider a new development philosophy and strategy. This new development policy is the SelfSufficiency philosophy proposed by His Majesty, King Bhumibol Adulyadej. Box 2 describes the essence of this Philosophy of Sufficiency Economy and various ways in which various people (including myself) have interpreted it. It appears that the government has become more careful about how to generate and manage economic growth. The spirit of the Sufficiency Economy has become the guiding principle of the 9th National Economic and Social Development Plan. 3. Economic Growth and Poverty Reduction The success of Thailand in its economic development efforts since the early 1960s was quite extraordinary. The economy grew on average about 6 per cent per annum in real term during the first 25 years of development since 1961. In mid-1980s, Thailand suffered some external balance problems which required it to devalue its currency several times, and had to seek credit assistance from the IMF. But in the latter half of the 1980s, Thai economy recovered quickly (see Box 1). The devaluation in 1984 helped increase Thai exports; the influx of Japanese foreign direct investment as a result of yen appreciation following the 1985 Plaza Accord helped speed up domestic manufacturing; and the success of Thai tourism industry in 1987 helped bring in vast amount of foreign exchange earning. While the growth rate of the economy from 1981 to 1986 averaged about 5 per cent per annum, the growth began to jump up in 1987. In 1988, Thailand achieved that highest growth rate in the world for that year at 13.2 per cent. This double-digit growth rate continued for 3 years ending in 1991. From 1991 to 1995 the growth rate of GDP ranged between 8.1 to 8.9 per cent. The economy began to experience difficulties in 1996, leading to the collapse in 1997. While the growth of the economy is normally depicted by the rate of growth of GDP like that shown in Chart 1, it is probably more instructive to show the welfare of the people through the increase in their household or individual income. The disaggregated household or individual income cannot be obtained from the National Income Account; it has to come from a special survey. The National Statistical Office (NSO) of Thailand has been collecting household income and expenditure data since 1962/63. These surveys form the database in which poverty incidence in Thailand can be calculated. Table 2 shows the relationship between the changes in these household income and poverty incidence in Thailand from 1962/63 to 1998. There are two series of data in Table 2. The first series shows the household income per capita from 1962/63 to 1986, and the corresponding poverty incidence (headcount ratio) for the same time periods, and the second series shows the same set of information from 1988 to 1998. The main difference between these two series is that the first series uses the poverty line that was originally estimated by the World Bank for its poverty study in Thailand in 1975 (see World Bank, 1980). This calculation of this poverty line for Thailand was based the nutritional requirements for an average 4 Chart 1: GDP Growth, 1962 to 1998 GDP Growth GDP Growth 10.0 5.0 98 97 96 95 94 93 92 91 90 89 88 87 86 19 19 19 19 19 19 19 19 19 19 19 19 19 84 83 85 19 19 -5.0 19 82 0.0 19 Percent (%) 15.0 -10.0 Year Thai, the consumption habit and patterns of Thai households, and the prices of food and non-food items that existed in the early 1960s. This poverty line was adjusted with inflation index each time a new study is undertaken until early 1990s when many researchers felt that the structure of population, the nutritional requirements, the consumption habit and patterns of the people had changed sufficiently to the point that a new poverty line was needed. Therefore, in 1996, Kakwani and Medhi (1996) computed a set of new poverty lines for Thailand using new nutritional requirements, new age structure of the Thai population, and spatial price differences across the regions. These new poverty lines vary according to the size and age compositions of members in the family, and the location where these families live. These new poverty lines were applied backward to the situations in 1988. Therefore the new poverty series that starts in 1988 represents the most up-to-date poverty measurement in Thailand at present. The detail about the incidence and profile of poverty in Thailand using the second series of data will be discussed later, but at this juncture, it is interesting to look at the simple relationship between economic growth and poverty reduction. Assuming that economic growth raises income of the people, and the increase in income pushes the people out of poverty, it is very obvious from looking at Table 2 that there exists an clear relationship between the increase in household income and the reduction in the incidence of poverty in Thailand. As will be mentioned later, this reduction in poverty in Thailand did not come about as a result of any specific, well-targeted poverty reduction policies or measures, it could be safely concluded that poverty reduction in Thailand came as a result of an overall economic growth. 3 3 A simple regression of head-count ratio (HCR) on household income per capita (Yp) on the two series gives the following results: For Series 1: HCR = 53.920 – 0.0036 Yp (7.123) (-2.409) R2 = 0.659 For Series 2: HCR = 43.2675 – 0.0109 Yp (25.193) (-13.052) R2 = 0.9827 The figures in parentheses are t-values. 5 I will now pay more attention to the incidence of poverty between 1988 and 1998. Prior to 1988, the NSO conducted the nation-wide socio-economic survey (SES) irregularly about once in every five years or so. From 1988 onward, however, the government had asked the NSO to conduct this SES every two years after realising that the results of the survey could be very useful in many policy decisions. Professor Nanak Kakwani of the University of New South Wales in his work with the NESDB had made an extensive use of these SES data, and had produced the results of his studies in a series of newsletters issued by the NESDB itself. Table 3, for example, shows the overall poverty situations for the whole kingdom from 1988 to 1998 (with preliminary information on 2000 added) 4 Three kinds of poverty measures are reported here: poverty incidence or the head-count ratio which shows the percentage of the poor in the total population, poverty gap ratio which shows the extent to which the actual income of the poor had fallen below the poverty threshold relative to that poverty line, and the severity of poverty index which shows how serious and how concerned the society is towards the existing poverty by giving more weight to income movement among the poor. 5 In general, the lower these indices are the better in terms of poverty alleviation. On the Head-Count ratio or the percentage of the poor in total population, it may be seen that the percentage of the poor in Thailand had fallen from 32.6 per cent in 1988 to 11.4 per cent in 1996 before rising to 12.9 per cent in 1998 mainly as a result of the economic crisis. Professor Kakwani had estimated the trend of this poverty improvement and predicted that had it not been for the crisis, the poverty incidence for the whole kingdom in 1998 would have fallen to only 10.8 per cent. The fact that the actual poverty incidence in 1998 was 12.9 per cent means that the impact of the crisis had caused the poverty incidence to increase about 19.7 per cent. In terms of the number of the poor during crisis, the last column in Table 3 shows that, without the crisis, the expected number of the poor would be 6.4 million. The fact that the actual number of the poor was 7.9 million means that there was a 22.3 per cent increase in the number of the poor between 1996 and 1998 (about 1.5 million people). Somchai and Jiraporn (2001) provided additional information on poverty incidence in 1999 and 2000. In 1999, the NSO conducted a special socio-economic survey for smaller sample size throughout the country (about half the size of 1998) in order to check and monitor the seriousness of the crisis on income and expenditure. The results had shown that although the average poverty line for 1999 was lower at 881 baht per person per month (due mainly to lower prices), the loss of income during the 4 Information on poverty incidence (and income distribution) from 1988 to 1998 was obtained from Kakwani (1989), whereas the additional information of the same for 1999 and 2000 was obtained from Somchai and Jiraporn (2001). 5 The Head-Count Ratio (HCR) is defined as HCR = q/n where q = number of population having income below the poverty line, z; and n = total number of population or income-receiving units. The Poverty-Gap Ratio (PGap) is defined as PGap = HCR . IGap where the Income-Gap Ratio (IGap) is equal to [(z-y*)/z] where z is the poverty line, and y* the average income of the poor. This ratio measures the extent to which the poor is far away from poverty threshold. Any transfer from the poor to the rich, while the HCR may remain unchanged would still the IGap.. This shows the proportion of total income or resources necessary to bring every unit below poverty line up to the poverty line. The Severity of poverty index is the same as the Foster-Greer-Thorbecke Index (FGT) which is defined as FGT = (1/n) ∑ [(z-yi )/z ]α where yi is the income of the poor individual, i, and α is a parameter that measures how sensitive the index is to transfer among the poor units. When α is 0, FGT becomes HCR; and when α is 1, FGT become IGap. The α value used in this study is 2. 6 year caused the incidence of poverty to increase to 14.6 per cent. By the end of 1999, the employment situation in Thailand had improved, and large amount of public spending had begun to show its multiplier effect, resulting in the proportion of the poor falling to 14.2 per cent in 2000. It is useful to discuss the distribution of income in the country as well when the issues of poverty is considered. Income inequality can be considered as relative poverty. It is often believed that the distribution of income of a country could become more unequal in the early phase of its economic development but will improve once a certain development level is reached. This is the famous ‘Kuznets Curve Theorem’ which relates the economic development of a country with increasing income inequality (as measured by the Gini index, for example) to produce an inverted Ushaped curve. The income distribution of Thailand exhibited the rising part of the Kuznets curve from the beginning of its modern economic development until 1992 when the Gini index reached the highest point of income inequality and began to fall after that. As shown in Table 4, the Gini index for 1992 was estimated at 0.0.536, falling to 0.521 in 1994 and 0.516 in 1996 and 0.509 in 1998. In 1999, however, the Gini index had increased to 0.531 or an increase of about 4.3 per cent. In 2000, as the employment situations improved, the distribution of income also improved, and the Gini index for 2000 fell slightly to 0.525. Also in Table 4 the income share of the overall population was divided in to 5 equal groups or quintiles, ranging from the poorest group (Quintile1) to the richest group (Quintile5). It may be noted that between 1998 and 1999, the income positions of all quintiles except the richest one had deteriorated. This is sufficient to explain the increase in the Gini index between these two periods as shown earlier. In 2000, the income position of the poorest quintile improved slightly while that of the richest quintile fell slightly, but overall the income distribution in the post-crisis period is still very unequal. In the last column of Table 4 we can see the ratio of the richest quintile (Quintile5) and the poorest quintile (Quintile1). The larger of this ratio shows the more unequal distribution of income. Not surprisingly, this ratio for 1999 of 15.2 is the highest. To conclude, the economic development of Thailand since the First Plan in 1961 had raised the welfare of the Thai people through an increase in their real income during the last three and a half decades. This increase in real income directly reduces poverty across the board in Thailand. However, the distribution of income became more unequal in the early periods of development, reaching the deepest inequality in 1992 before worsened again as a result of economic crisis in 1997. In 1998 when the crisis reached its lowest point, poverty reversed in declining trend and became higher, while the income inequality also reversed itself equalising trend and became more unequal again. The economic crisis of 1997 had indeed created enormous havoc in the normal life of the Thai people. It is an economic event that will forever etched itself in the Thai economic history. We need to know the causes of this crisis and must do our best to avoid it in the future. 7 4. The 1997 Economic Crisis and Policy Responses 4.1 Causes of Economic Crisis On looking back, the new economic development in Thailand that started in earnest in 1988 with the establishment of the new government under General Chartichai Choonhavan had created a situation that an economic crisis of some sort could not be averted. It was the crisis that Thailand ‘has to have’. Why? This is because everyone was carried away by the euphoria of economic success and prosperity. Short-term and long-term foreign capital kept pouring in, adding to the economic bubble that was already forming. There is no shortage of analysis on the causes of the Thai currency turned financial and economic crisis. 6 In my own analysis, I have pointed out six factors that led to the crisis, namely financial sector mismanagement, high current account deficit, high domestic interest rate and uncontrolled capital inflows, the rigidity of exchange rate, lack of economic leadership from political leaders, and the decline in export performance. (1) Financial-sector mismanagement. Many banks and financial companies lent excessively, and imprudently, made possible by abundant and cheap foreign sources of money. Much of the loans were spent in the non-productive property and stock markets. The existing state philosophy protected public financial institutions at all costs, creating a grave moral hazard. (2) Current account deficit. Thailand had spent beyond its means; it had to borrow from the savings of other countries to finance its investment and consumption. This overspending became chronic and reached a level thought to be unsustainable (more than 8 percent of GDP in mid-1997), creating uncertainty in its ability to maintain the fixed rate of the baht. (3) High domestic interest rate and uncontrolled capital inflows. High interest rates in the domestic market and low interest rates in overseas markets induced uncontrollable inflows of foreign capital. An excess inflow of foreign capital pressured the local currency to appreciate; subsequently, baht appreciation hurt Thai export performance. (4) Rigidity of the exchange rate. Thailand attempted to practice the so-called impossible trinity, the combination of a fixed exchange rate, freedom from capital controls, and freedom from interest rate control. This was abandoned when the U.S. dollar appreciated in early 1997 as the baht became overvalued and subsequently devalued. (5) Lack of economic leadership from political leaders. Before flotation of the baht, political leaders were kept out of the decision-making process concerning the use of reserves to defend the baht. The existing system had not required close supervision or consultation of top leaders of the country, and leaders were informed after foreign reserves were depleted. (6) Decline in export performance. Increasing costs in the production of Thai exports eroded the price competitiveness that Thailand had over other competitors, especially China. The slowdown in world demand of Thai exports also contributed to the decline in export performance, although the overvalued baht was another factor. With a high current account deficit, the poor export performance in 1996 and early 1997 severely hurt the Thai economy. 6 See, for example, Ammar Siamwalla (forthcoming), Ammar Siamwalla and Orapin Sopchokchai (1998), Somsak Tambunlertchai (1998), and Sauwaluck Kittiprapas (1999). 8 4.2 Policy Approaches to Economic Crisis I will leave the account of the social impacts of the economic crisis until later. What I want to do now is summarise policy approaches adopted by the government during the first two years to combat this crisis. When Thailand turned to Japan and the IMF for help after the meltdown of its currency in July 1997, it had less than 3 billion US dollars left in its foreign reserve. More than 30 billion US dollars were lost in the defence of the baht. Japan and the IMF together had managed to raise 17.2 billion US dollars rescue package for Thailand. This package had come with the usual IMF conditionalities. First, the IMF had asked the Thai government to spend less. As it is now well known, this was a bad decision as the contraction in the private economy got worse with this drastic cut in public spending. However, the IMF had some reasons for making such a recommendation. The losses from the bail-out of the commercial banks and finance companies would require the government to use enormous amount of public funds to payback to the Financial Institution Development Fund (FIDF) which provided the bail-out money in the first place. The government needed all the public savings it could get, and that included the increase of the ValueAdded Tax (VAT) from 7 to 10 per cent. This latter measure was also another bad idea because it had caused further contraction, created tax evasion, and hurt the majority of workers and other fixed income and self-employed people. Other than these two fiscal measures, the other measures were followed by the Thai authority with a better result. First of all, the currency was already floated (devalued), so this part of conditionalities was met. Next, the mismanagement of the financial sector which was at the heart of the problems was tackled immediately and forcefully. Through special legal power, the Thai monetary authority suspended more than half of the finance companies and eventually seized control of almost all of them. A special institution called the Financial Sector Restructuring Authority (FRA) was established to auction off the assets of these failed financial institutions to pay back the debts to the government. The Bank of Thailand also ordered the remaining financial institutions to increase their capital bases, and establish more stringent controls over their loans. In order to help them recapitalise their capital bases, the majority control of foreign financial institutions was allowed. The government also provided public funding for those banks who were having problems with the recapitalisation requirement and would like the government to help in exchange for some public control on the management and operation of those banks. These stringent recapitalisation plans by the Thai government were often criticised for being too stringent, but the government was quite adamant in its intention to enforce these accepted international standards for the future of Thai banking institutions. On monetary policy, the Bank of Thailand has kept a watchful eye over the fluctuation in the exchange rate. When the baht is weak in the exchange market, domestic interest rate will be kept high to help stabilise it, but when the baht becomes stronger and more stable, this high domestic interest rate would be reduced. Domestic money supply was also under close scrutiny by the Bank of Thailand so that the appropriate rate of monetary expansion is maintained to reduce the pressure of inflation. The government had succeeded in cutting its budget to the point that a fiscal surplus for the fiscal year 1997 was achieved, but later the IMF had agreed to allow larger and larger fiscal deficits so that the public sector could usher in the 9 economic recovery and to help provide social assistance to the public (social safety net and social investment programs).. Perhaps one earlier good news was the good performance in the external sector where exports had increased while imports had plummeted. The positive change in the external sector was so quick and drastic that the current account had turned into surplus within a few months after the crisis broke. From October 1997 onward the current account of Thailand remains in surplus. At the end of July 1999, this surplus amounted to more than 1.2 billion US dollars. This had positive effects upon the external confidence on the Thai economy as shown by the continued improvement in the exchange rate of the baht since February 1998. It was earlier expected that the economy would bottom out before the end of 1998, and earlier signs in both the domestic sector (low inflation rate, falling interest rates) and the external sector (stable exchange rate and slowdown in capital outflows) but this was not to be the case. To succeed in stimulating the economy quickly, the commercial banks must be able to start lending quickly. At first these banks were not able to do so because of tight money situation. But when the liquidity was eased and the interest rate was brought down, commercial bank lending was still slow. Most local banks were burdened with large numbers of non-performing loans (NPLs), and the corporate debt restructuring between these banks and their debtors was not very successful at first. The bankruptcy law that existed at the time of the crisis was inadequate to cope with the situation where debtors and creditors need to negotiate about their debt settlement quickly and move on. The attempt by the government to enact a new bankruptcy law was faced with strong resistance from the Thai political community, particularly in the Senate. It took the government several months to pass this new law, with several compromises. This was one of the reasons the new bankruptcy law was not very effective in changing the behaviour and practices of Thai debtors. As a result of recapitalisation push of many commercial banks, the liquidity situations became loose again, but commercial banks still refused to lend for fear of NPLs. 4.3 Some Macroeconomic Results (a) GDP Growth As can be seen from the Chart 2, the economy was growing at the rate of about 4.7 per cent during the last quarter of 1996. During the first half of 1997, the economy began to falter through stagnant export, with the GDP growth less than 2 per cent at the end of the second quarter of 1997. Then the crisis struck. The growth rate of GDP during the last quarter of 1997 was minus 4.6 per cent. The economy was already in recession. The economy continued to contract throughout 1998, and reached the bottom during the second quarter of 1998. It then began a slow climb back, achieving the positive growth rate for the fist time since the crisis broke during the second quarter of 1999 (with the GDP growth rate of just 0.1 per cent). The growth hit the highest rate in the post-crisis period at 7.5 per cent during the third quarter of 2000 then became more laboured through the remainder of 2000 and 2001 due to the slowdown in the world economy. The latest growth statistics for the third quarter of economic growth in Thailand shows the Thai economy grew only 1.5 per cent during this quarter. 10 Chart 2: Growth Rate of GDP, 1995 to 2001 10 % GrowthRateofGrossDomesticProduct:Q2/1995Q4/2001 5 0 -5Q4/95 Q4/96 Q4/97 Q4/98 Q4/99 Q4/00 Q4/01 -10 -15 -20 GDP Original SeasonallyAdjusted Source: NESDB (b) Production and Trade The production situations before and after the crisis are divided into two parts, agricultural production and manufacturing production. With the overall crop production in 1995 set at 100, the index for 1996 and 1997 were 106.1 and 110.9, respectively. It may be seen that the crop production index for 1998 was 109.1, only a slight, almost imperceptible, decline from 1997 level. A simple interpretation of this phenomenon is that the crisis had little impact on the crop production of the country. Indeed the relative crop production levels of 1999 and 2000 continued to grow strongly with the respective indices of 115.3 and 121.7 for 1999 and 2000. The depreciation of the baht had made the agricultural commodities of Thailand cheaper in the eyes of foreigners, and the demand for them had subsequently increased. 7 Chart 3: Industrial Growth and Capacity Utilisation IndustrialGrowth& CapacityUtilization % 100 80 60 40 20 0 -20Q1/96 -40 Q1/97 Q1/98 Q1/99 IndustrialCapacityUtilization( Q1/00 Q1/01 GrowthRate(%) Source: NESDB 7 It should be noted, however, that the increase in agricultural section is in terms of volume, not value. In fact, with the price of agricultural commodities generally lower in 1998 and 1999, the earning from agricultural exports of Thailand in 1999 and 2000 actually declined despite a larger volume of production and sales. 11 The situation was different with regards to manufacturing production. The total index of manufacturing production declined from 107.1 in 1997 (with the index for 1995=100) to 96.5 in 1998. However, the manufacturing production picked up quickly in 1999, with the index of 108.6, and in 2000 with the index of 112.1. Again, the massive devaluation of the Thai currency explains a lot of this increase through production for export. The value of exports in 1996 in dollar terms was lower than that of 1995. This was one of the reasons that brought about the crisis as mentioned earlier. In 1997, the export earning in dollar terms improved slightly but fell again in 1998. It was not until 2000 when the value of export in dollar terms had increased noticeably. Thailand has to sell a lot more in volume terms to receive the same amount of earning compared to the situation before the crisis. Even before the crisis, there was an excess capacity in the manufacturing sector of Thailand. Chart 3 shows that in 1995, two years before the crisis, the industrial capacity utilisation was estimated at 77.4 per cent. This fell to 72.5 per cent in 1996. The economic shocks at the end of 1997 hit the industrial sector hard as the rate of capacity utilisation dropped to 64.8 per cent in 1997 and hit the bottom at 52.8 per cent in 1998 before increase slightly to 61.2 in 1999. Regrettably, the industrial capacity utilisation during the last two years do not show much improvement at all. In fact, the latest figure for September 2001 only shows the rate of capacity utilisation of only 52. 8 per cent, the same level as at the bottom of recession. (c) Consumption The crisis had brought about fear of uncertain future among the people resulting in their withholding the purchase of unnecessary items and/or increase saving. This has a deleterious effect on expansion of the economy. The Composite Private Consumption Index shows a decline from 101.4 in 1997 to 95.4 in 1998 (with 1995=100). Typically private consumption was slower in comparison with the manufacturing production in their response to economic change. In the short-run, many people would find it difficult to cut consumption quickly, and they are likely to try to maintain their consumption patterns as long as they could. If the economic downturn continues, these people have no choice but to slow down their consumption also, and in reverse, would not adjust quickly to the return of economic normalcy. This phenomenon is very clear when we compare the Composite Consumption Index with the Manufacturing Production Index. Whereas the manufacturing activities showed a strong recovery in 1999, the Consumption Index was still at 96.9 in 1999. Even in 2000, the Consumption Index was only 100.2, only slightly higher than the starting period in 1995. Domestic aggregate demand will need to go up much higher if the economy is to maintain a much higher rate of growth than now. 12 HouseholdConsumptionExpenditureGrowth % 10 5 0 -5Q1/96 Q1/97 Q1/98 Q1/99 Q1/00 Q1/01 -10 -15 -20 RealTerm SeasonalAdjusted Chart 4: Household Consumption Expenditure Growth Source: NESDB (d) Price Level The price level in Thailand rose quickly after the crisis struck at the end of 1997, especially food price. Not that food was scarce, but the increase in the demand for food as a natural response to a crisis had bid up the food price. The food price index was highest in 1998 (137.9 compared to 125,9 in 1997) representing the rate of increase in the price level of 9.5 per cent. In 1999, however, the food price had come down. Meanwhile the non-food items whose supply was plentiful as a result of excess production capacity did not increase much in price. It, therefore, acted to pull down the overall price inflation in the economy. The core consumer price inflation (calculated from the index excluding the raw food and energy items) for the periods 1997 to 2000 stood at 4.7, 7.2, 0.02, and 0.7 per cent, respectively for 1997 to 2000. Even in the second quarter of 2001, the core consumer price inflation was only less than 1.5 per cent. This low inflation helped economic recovery and cushioned the plight of poor families and families of laid-off workers as well. The change in the price level using GDP deflator shows similar result as the change in consumer price index. Chart 5: Growth Rate of GDP Deflator GrowtRateofGDP defator,CPI,PPI % 60 45 30 15 0 -15Q1/96 -30 Q1/97 Q1/98 GDP deflator Source: NESDB Q1/99 Q1/00 CPI Q1/01 PPI 13 4.4 The Social Welfare Effects of the Crisis and Policy Responses There are at least three ways that the life and well being the Thai people could be affected by the crisis. One way is for the crisis to hurt the private business causing losses which could lead to the companies shedding their workers or employees. The loss of employment is a major source of adverse outcome of the crisis. The second way is for the crisis to cause a slowdown in economic activities causing a drop in income of the self-employed like the farmers, and a cut in wage or salary of those who remain in employment. But while these two ways cause the negative effects on the people, the government or the state could intervene to help by providing social assistance through its social spending such as on health, education, or other welfare. In this section we will discuss these three ways in which the life and welfare of the Thai people are affected by the crisis. (a) Employment and Unemployment This crisis has hurt many people in different sectors differently. In the public sector, public servants who are normally paid less than their counterparts in the private sector may lose some of the fringe benefits that come with the jobs such as medical allowances, supplementary salaries based on special qualifications or entertainment expenses due to government budget cuts, but their job security has remained intact. The long-standing policy of the government to freeze the size of the public officials by allowing no more than a 2 per cent increase in the existing work force annually actually helps those who remained in the jobs because the government does not need to incur heavy additional costs to look after new officials. The situation is different for private sector workers, the professional and business people are those who were most adversely affected by the current economic crisis because the economic slowdown has translated into less economic activities and income. Those who had foreign-denominated debt without appropriate hedging had suffered immensely from the rapid depreciation of the baht. The wage and salary workers are also affected by job losses. These people may benefit from availability of credits but only through the regeneration of jobs and employment by the professional and business people. Lack of unemployment benefits in the Thai social security system makes these workers very vulnerable to hardship. Some may have to find a new job completely in order to survive, and a majority of these unemployed wage and salary workers may have to depend on their families at least in the short-run until business activities improve, or a new job is found. Wage workers who came from the countryside may choose to return to the rural areas where family supports are still available. Farmers may be the only group of people who could benefit from this crisis. Assuming that their production inputs are mainly land and labour which have little import contents, their products would be in greater demand through a depreciated exchange rate (as is actually the case with regard to the production and exports of high-quality rice). However, they could not escape the impact of inflation brought about by the increase in the costs of production of other necessary household goods and services. Moreover, the burden of the farm sector in the rural areas in looking after members of the families who had gone to work in cities but returned home after job losses could put a great deal of pressure on these farmers who are generally the least well off in the society. 14 The analysis in this paper is based on the Labour Force Survey which have been compiled by the National Statistical Office (NSO) since 1963. The NSO presently conducts four rounds of the survey for the whole kingdom each year; the first round is scheduled in February to capture the data on the non-agricultural season; the second round is normally held in May when new graduates finish their schooling and join the workforce; the third round is held in September – during the peak agricultural season; and – starting from 1998 – the fourth round of survey has been conducted in November as well so as to better capture the changes in the data. Readers of this paper should note that the patterns of employment of many Thai workers often exhibit high degrees of underemployment, shifting, or seasonal employment from circular migration (especially between rural and urban areas during the dry and wet season). In addition, due to the lack of unemployment insurance facilities, poor workers have to try to find new odd jobs as soon as they lost their old jobs. This type of employment pattern is difficult to assess. Since a large proportion of the population is working in the agricultural sector, unemployment usually increases during dry season and falls during wet season. In order to accurately analyse unemployment data, this seasonal effect must be taken into consideration. A recent study by Professor Nanak Kakwani has attempted to do that. He had used the employment trends of the periods before the crisis to project the employment and unemployment situations in the crisis period (the first quarter of 1998). The difference between this projected figure and the actual figure is an estimation of the effects of the crisis. As it turned out, the estimated unemployed persons as a direct result of the economic crisis numbered about 810,000 – much lower than the often quoted number of between 1.5 to 2 million persons. The study also found that the effect of the crisis on total unemployment was statistically insignificant. This may infer that the nature of the crisis was cyclical and not structural. A new study by Behrman, Deolalikar, and Tinakorn (2001) presented several interesting findings on the overall labour market effects in Thailand. Some of their findings are: (1) The pre-/post- crisis comparison indicates that there were not only significant downward quantity adjustments in employment, but also in hours worked and in shifts from wage to non-wage employment. (2) The post-crisis average real wage rate did not decline compared to pre-crisis levels (except for some rounds). Actually, post-crisis average real wage rates exceeded pre-crisis real wage rate due to a combination of reduced hours worked for fixed (monthly/weekly) pay workers and some movements from wage to non-wage employment by previously lower wage workers. (3) Wage labour earnings in Thailand decline only by about –7.6 per cent in 1998, which was less than the decline of –10.0 per cent in GDP. Workers in other Asian countries were not as lucky, since wage labour earnings declined nearly three times as much as GDP in Indonesia and Korea. (4) Previous studies on the labour market outcomes in Thailand and other East Asian economies confound changes in hours worked in 15 their measures of changes in real wage rate and hence can be misleading with regard to price or wage effects (aggregation problems). (5) Wage flexibility in Thai labour markets are not as high as those in some low-income countries (e.g. Indonesia) where post-crisis unemployment change was minimal. According to the LFS data, unemployment began to surge dramatically in the first quarter of 1998 (dry season) from 0.9 per cent of the current labour force to 4.8 per cent of the labour force. Unemployment remained high for several quarters and peaked at 5.6 per cent in May 1999 before declining to 3 per cent in August 1999. A recent data shows that unemployment rates are between the 2.5 per cent - 3.5 per cent range, which are still higher than the pre-crisis level (between 1 per cent - 2 per cent range). In October 2001, about one million people are reported to be unemployed (3.2 per cent of the current labour force). There are several policies which have existed in Thailand prior to the crisis such as policies on minimum wages which is set according to regional labour market conditions, severance payments, social security, and labour unions. However, some these policies are not strictly adhered to or do not cover the majority of workers, and hence are not as effective as they should be. Take minimum wage for example, LFS Data shows that approximately 30 per cent of all wage employees in the Thailand earn wages that were below the minimum wage. Therefore, further expansion of public 6% 5% 4% 3% 2% 1% (F eb .9 6 (F eb .9 7 (F eb . (A 98 ug .9 8 (F eb .9 8 (A ug .9 9 (F eb . (A 00 ug .0 0 (M ar .0 1 0% Underemployed Unemployed works programs could be the principal vehicle for temporarily strengthening social safety nets; as public works programs which guarantees at least the minimum wage rate is attractive to these poor workers. There are several measures that the government could undertake in order to prevent future negative impacts on the labour market. These include prioritising human resource development, synchronising between technology-intensive industries and labour-intensive industries, introducing more employment options (alternative employment industries and SMEs), enhance social security and unemployment/ severance benefits, and improve law and policy enforcement against misuse of labour (exploitation of children, women, and migrant labourers). 16 (b) Individual income and its distribution A series of Tables 5 to 9 depict various aspects of the changes of average income and expenditure of households in Thailand from 1975/76 to 2000. I have already discussed this topic in Section 3. This section simply provides additional information on the detail of sources and distribution of income of Thai households in the last 25 years or so. I have mentioned earlier that the NSO has been collecting data and information on household income and expenditures of the Thai households since the early 1960s. By mid-1970s, it has become very proficient at these socio-economic surveys which provide accurate and reliable information for researchers who want to study poverty and income inequality among the Thai population. Table 5, for example, shows that the average monthly household income steadily increased from 1,928 baht in 1975/76 to 10,779 baht in 1996, one year before the crisis. 8 Note that the average income of Thai households continued to increase to 12,492 baht in 1998, and indeed to 12,729 baht in 1999. This can be seen as a delayed effect of the economic crisis. But more accurately, however, this could be interpreted to mean that there are both gainers and losers in the first two years of the economic crisis, and the it appears that the average income of households did not fall until the year 2000. This is also a problem of distribution, or rather, maldistribution of income. On the expenditure side, the household expenditure did fall slightly between 1998 and 1999. At least the anxiety and apprehension of the crisis was shown here among the average Thai households. By 2000, the cut in home consumption was very clear. This is a natural response to hard time. Table 6 shows a clear trend of modernisation of the Thai economy where the importance of money income increases, and that of income-in-kind decreased. Tables 7 and 8 further substantiate this modernisation trend where the non-food expenditure increased against food expenditure, and income from wage and salaries had shown an increased important. Table 9 indicates an interesting fluctuation of income distribution. Income inequality in Thailand reached the peak in 1993, then fell continuously until the depth of the crisis in 1998, then increased in 1999. With the economic situation improved in 2000, the inequality also slightly declined. Table 9 shows income inequality classified by different regions and locations. It is obvious that the regional inequality is less than national inequality because a national inequality as a result of the combination of a rich region, say, Bangkok, and a poor region, say, the Northeast, would be certain to stretch the income distribution further, causing greater inequality. It is possible that the crisis still bring about the increase in average household income as was the case in Thailand, but this is possible because the income distribution has become more skewed, and it was the income position of the rich that makes up to the increased in the average income of the overall households. Section 3 has already discussed the details of poverty and income inequality. It is sufficient to say here that future income policy should not address only absolute poverty problems, but relative poverty problems as well. Otherwise, the situation that we saw in Thailand in 1998 and 1999 could happen again, that is to the average income has shown an increase 8 Since 1988, the government has instructed the NSO to conduct this SES every two years. The SES in 1999 was a special survey that the government asked the NSO to carry out in order to find out the impact of the economic crisis. 17 while the majority of the population is genuinely suffering from economic hardship through job losses and the fall in income and earning. (c ) The Role of State in Providing Social Assistance: Health, Education, and others There were many government spending programs which target at alleviating negative social impacts resulting from the crisis. The Chuan Government has been using part of the normal government budget to assist and resolve problems experienced by the poor (simply defined as people whose income are lower than 10,000 baht per year). The other part of the funding came from loans from foreign governments and organisations: (1) The Social Investment Project (SIP) from the World bank and the Japan Bank for International Co-operation (JBIC) totalling 21,689 million baht. Through this government loan program, the Government Savings Bank distributed and lent out money to local authorities and organisations in order to enhance their residents’ economic positions. (2) Loans from the Asian Development Bank (ADB) under the Social Sector Program Loan of approximately 7,800 million baht. This fund was mainly used to alleviate the negative impacts experienced by the newly unemployed and the disadvantaged people in the society. (3) Loans from the World Bank and the JBIC to help increase growth-induced government spending. This package was announced in March 1999, with the following details: Million Baht (1) Investment and job creation aimed at alleviating the 24,827.25 social impact of the economic crisis (2) Improvement in the quality of life 9,564.99 (3) Improvement in the foundation of economic development 7,008.55 (4) Improvement in the competitiveness of manufacturing and export 2,329.92 industries (5) Improvement in basic infrastructure and the development 867.46 of specific areas (6) Enhancing the effectiveness of public administration 8,799.74 Total 53,397.90 Source: ECONOMIC STIMULUS PACKAGE OF THE THAI GOVERNMENT March 1999 (No. 41/1999) It was commonly referred to as ‘the Miyazawa fiscal stimulus package’ or ‘the Miyazawa Plan’ following the name of the Japanese Minister of Finance who provided a large portion of funding for this social assistance program. The policy started hiring people in April 1999. It generated short-term employment for low-skilled workers in the rural areas in the rehabilitation of water supply, irrigation, and other public work. 18 (4) Measures to encourage rural and society development. The budget for this program was 4,272 million baht, and the funding came from existing SAL loan (no additional borrowing necessary). To sum up, after two years of conservative, market-driven, policy packages, the Thai economic began to show sign of recovery. This was helped also by various statedirected policy packages, for example, two major economic stimulus packages by the government, one in March 1999 and the other in August 1999, and heavy doses of tax cuts and increased public spending. In early September 1999 when the Thai government was preparing its 8th and last Letter of Intent to the IMF, the economy had clearly shown strong signs of recovery. The manufacturing production index had shown continuous positive increase, whereas the private investment index had stopped its decline. The household consumption has also begun to increase, thanks to stable price level, cuts in income and sales taxes, increase public spending, and so on. The growth rate of GDP was 4.6 per cent in 1999 and 4.6 per cent in 2000. The current account remained in surplus, while the balance of payments also turned to surplus one year after the massive outflows of capital which precipitated the crisis. Employment started to increase as the production in the real sector began to come to life again. But as the economy had shown signs of responding to the government’s medicine at the end of 1999, the government itself appeared to have run out of its own gas. It was ineffective in tackling the two stickiest problems, the continued high level of NPLs and the stagnant real estate sector. The unresolved NPL problems had caused a failure in commercial bank credit expansion. The rising oil price in 2000 compared to two years earlier, had dampened the GDP growth. The export was growing well in 2000, but that was partly because the baht had become weaker. Toward to end of the year, the US economy began to slow down, whereas the Japanese economy continued its depressed state. The prospects of the Thai economy at the end of 2000, therefore, was not very promising. Coupled with popular political campaigns of the new political party, the Thai Rak Thai (TRT), the government under the Democrat Party became unpopular, and lost the election to the Thai Rak Thai at the general election in early 2001. 5. Current Development Policies: An Evaluation The events surrounding the victory of the TRT Party and the subsequent assumption of power of Mr Thaksin as the current prime minister of Thailand were very interesting. The new constitution promulgated in October 1997 was already in force which had given a kind of political transparency that hitherto unexperienced in Thailand, such as strict rules against vote buying, separation of legislative power from executive power, creation of various legal bodies to counter the political influence of politicians and bureaucrats, and so on. As a successful businessman who has made a fortune in telecommunications, Mr. Thaksin was financially secure to make deal with old- and new-styles local politicians to lend their support for his eventual prime ministership. At the same time, Mr. Thaksin needed to seek the support of modern businessmen, many of whom were counted among those who were laden with NPLs but whom political, social, and economic influences were large. He also had the support of many technocrats and business associates who could provide the necessary political manpower to run a modern government. Despite the shaky start due to the 19 impending case against him in the Constitution Court for his indictment for the concealment of his assets (which could cost him the prime ministership if found guilty), Mr. Thaksin won his case and thus could concentrate on implementing his election promises. These election promises were no small matters. It is true that Mr. Thaksin has the capability to be prime minister and head of progressive government, but there is no denial that his Party overwhelmingly won the election because of these election promises. Once in power, he must fulfil his party’s election promises which became guidelines for his development policies. In the context of appropriate governance, he has to do two things at the same time, that is to continue to maintain and speed up the economic recovery and to implement policies that essentially bestow social welfare or social well-being to a certain target group of people, mainly farmers and the people in the countryside. In February 2001, Mr. Thaksin announced his government’s policies to the Parliament. In his policy statements, Mr. Thaksin introduced several ‘urgent’ policies aiming at improving the living standards of the people. Nine of his urgent policies are as follows: (see summary of these policies in Table 10). (1) Immediately grant a grace period for both interest and principle payments for 3 years for individual small farmers to relieve their debt burden as part of a comprehensive reform of the traditional farm economy to be more viable and self sustaining in the long term. (2) Establishment of the Village and Urban Revolving Fund, funded with one million baht each as a loan facility available for individuals and households of each community to borrow for local investment and supplementary vocations. Concurrently, the Government will promote a "One Village One Product" project to enable each community to develop and market its own local product or products based on traditional indigenous expertise and local know-how. The Government is further prepared to provide additional assistance in terms of appropriate modern technology and new management techniques to market such local products from the village to domestic and international outlets through a national or international retail network or through the internet. (3) Establish a People’s Bank to ensure better and improved access to banking facilities and resources for low income citizens to enhance their capacity to increasing their income from self employment and thus reduce their dependence on organised and punitive money market sources. (4) Establish the Bank for Small-and Medium-sized Enterprise in order to promote existing and increasing the number of entrepreneurs in a systematic manner with a view to expanding the national productivity base, increasing additional employment opportunity and creating income, promoting exports, and serving as the mainstay for future national economic growth and stability. (5) Establish a National Asset Management Corporation in order to comprehensively solve the problem of Non-Performing Loans (NPLs) in the 20 commercial banking system swiftly, systematically, comprehensively and to enable the financial system to resume their normal credit functions. (6) Utilise State Enterprise as key vehicle to mobilise domestic resources from Thai investors to promote revitalisation and development of the Thai economy through selling shares of incorporating a holding company incorporated by grouping a number of state enterprises with strong income potentials employing professional management and free from political interference as one alternative and listing of individual state enterprise directly in the Stock Market of Thailand at the appropriate time as another alternative. (7) Provide universal health insurance with a view to reducing the overall cost to the country and the people in acquiring health-care capping each hospital visit at 30 baht. All Thai people will be guaranteed that equal access to a nationally acceptable standard of health care. (8) Accelerate efforts to establish drug rehabilitation centres concurrently with implementing effective drug suppression and prevention measures. (9) Encourage full and open public participation in the prevention and suppression of corruption. How good are these policies? Will they be able to generate necessary growth and provide specific welfare to the people at the same time? Are there better alternatives to these policies which are conditioned by election promises. Is Mr. Thaksin different from, and better than other prime ministers before him? These are some of the questions that many will raise while evaluating the success or failure of his policies. Let take a look at some of his policies referred to above. (a) The National AMC Policy and the Solution to NPL Problems I have said earlier that one of the two stickiest problems facing Thai government during economic crisis was the problems of NPLs. The last government under Mr. Chuan Leekpai attempted to solve the problem by recapitalising banks and finance companies. The Government, with the advice from the Financial Restructuring Advisory Committee, the Ministry of Finance (MOF), and the Bank of Thailand, implemented the August 14th 1998 Recapitalisation Scheme promising to provide matching Tier 1 capital for Thai financial institutions that can find funding from strategic partners. The scheme also offers to provide Tier 2 capital to financial institutions in percentage terms of their credit extension and debt restructuring. At the end, only about one-third of the 300,000 million baht pledged for this program was actually used, indicating that there were some concerns among the private banks about government intervention if they enter the program, especially the Tier 1 Scheme which the MOF has the right to appoint a representative(s) in the Boards of participating financial institutions, and reserves the right to change the existing management team if it sees fit. The establishment of a national asset management corporation (AMC) was one of the Thaksin’s government brainchild. Thai Rak Thai proposed to establish a central, government-run organisation to take over the NPLs and facilitate a quick debt 21 restructuring to strengthen the real sectors and the service sectors, with the hope to kick start the economy. This idea of the nationalisation of bad loans differs from the Chuan government’s policy of encouraging banks and financial institutions to set up private AMCs to manage their own NPLs. The TAMC intends to restructure a substantial amount (500,000 million baht) of NPLs by the end of 2002. All NPLs are expected to be resolved in two years’ time (by the end of 2003). The TAMC will continue to monitor the performance of the restructured loans for another 3 years. By the end of 2006, all the process is expected to be concluded – 3 years earlier than originally expected. It was reported that the TAMC will initially focus on big debtors so as to stimulate the economy, then it will turn to focus on smaller debtors – some of which can be grouped up and managed by professional asset managers. 9 The TAMC not only sets ambitious goals for itself, but it also sets equally demanding goals for the state-owned banks who act as its asset managers, for the management of the NPL pools. State-owned banks are responsible for managing the single creditor loans which they originated and are given nine months to finalise all deals (until September 2002). Debtors normally propose debt restructuring plans with a certain percentage of haircuts. So far the TAMC has approved an average of 10-20 per cent haircut (or debt reduction). How does TAMC work? The TAMC was set up in June 2001 after the enactment of the TAMC Act. Its current Board consist of a banker, a representative from the Industry Council of Thailand, a representative from the Trade Council of Thailand, and nine technocrats/bureaucrats. The assets which were transferred are separated into two types: state-owned (state banks and AMCs) and private-owned.(private banks and AMCs). State-owned AMCs are not allowed to be the lead creditor in multicreditor debt restructuring negotiations. The difference between these two types of transferred assets are shown in the Table below. Table 11: Difference between State-Owned Assets and Private-Owned Assets Under Article 30 : state-owned FI Under Article 31 : private-owned FI 1. Classified as NPLs as of 31 Dec 01 1. Classified as NPLs as of 31 Dec 01 2. Outstanding balance over 5 mn baht 2. Outstanding balance over 5 mn baht 3. Loans can be collateralised or non3. Loans without collateral (clean loans) collateralised are not accepted 4. Single creditor loans can also be 4. Only multi-creditor loans can be transferred transferred 5. Exclude case where the Court 5. Exclude case where the Court judgements are finalised, or restructuring judgements are finalised, or restructuring process is completed prior to the transfer process is completed prior to the transfer date date 9 It has been observed, however, that NPLs that have not been settled one way or another now, almost 5 years after the meltdown, are probably beyond any resurrection now, and are probably better off liquidated. Dr. Ammar Siamwalla, for example, believed that by the time the TAMC was set up much of the damage to the economy and therefore to asset values had already occurred. The firms and assets that could be kept intact had already gone through either the Corporate Debt Restructuring Advisory Committee (CDRAC) process or the bankruptcy courts. The assets that remained would only command break-up values. See Ammar (2001). 22 According to the gain/loss sharing scheme between the TAMC and the financial institutions (Articles 47 - 52), the financial institutions would shoulder the first 20 per cent loss, while the next 20 per cent loss would be split equally between the TAMC and the financial institutions. The TAMC will be responsible for all losses over the 40 per cent threshold. If the overall results turn out positive, the first 20 per cent of the gains would be shared equally between the TAMC and the originating financial institutions. Gains above 20 per cent will go to the financial institutions (but not to exceed the difference between the accounting value of the asset and the transfer price). Any extraordinary gains belongs to the TAMC This is a method to resolve NPLs which this government hardly need to worry about upfront payments, as the initial investment is paid out of the FIDF (which receives regular funding from the banks), and the TAMC uses the interest income from debtors to fund its day-to-day operations. As for the payment for the NPLs transferred, this government has arranged for the TAMC to pay the financial institutions in the form of promissory notes (P/N) which has a 10-year maturity. How will the TAMC finance the P/N repayment with cash in ten years’ time is not this government’s problem – the government in power in the year 2011 will have to figure that out. TAMC encourages financial institutions to extend additional credit to debtors by promising that any new financing that they provided would receive a senior debt status (that is, they would get their money back before other original creditors). The government also introduced a new ‘matching fund’ concept whereby a Fund can choose to invest in companies which has been restructured by the TAMC. The first Fund was established in April 2002 with joint funding from Ceberus (an international asset management firm) and Krung Thai Bank and the Industrial Finance Corporation of Thailand (or IFCT, both of which are state-owned financial institutions). Minimum investment in each debtor company is set at 5 million USD. The government stressed that the primary intention of the matching fund must not be to purchase assets from the debtor companies, but should be to restructure the companies. A few other Funds have expressed interests in joining this Matching Fund program. Since October 2001, the TAMC has accepted multiple lots of loans (around 4,600 accounts) from state-owned financial institutions and private financial institutions, with book value totalling almost 700,000 million baht – significantly lower than their original target of 1,100,000 million baht. In the TAMC’s latest progress announcement as of March 31st, 2002, it reported a completion of 100,216 million baht (177 cases) of debt restructuring, up 100 per cent from its previous announcement three weeks earlier (50,133 million baht). Of this number, 55.4 per cent are cases with multiple creditors (67 cases). 37.1 per cent of the cases are in the property sector, 26.8 per cent are in the industrial sector, and 15.4 per cent are in the service sector. Even though the overall restructuring figures for the TAMC seemed impressive, some felt that the core of the problem has not been resolved. There were speculations that a majority of the 50,083 million baht of NPLs restructured in the last three weeks of March 2002 are single creditor loans (previously originated by government-owned banks) which are much easier to resolve compared to multi-creditor loans. Since the TAMC only employs less than 100 full-time staff, one might question whether it is 23 possible to conduct a thorough analysis of each debtors’ financial status prior to executing these restructuring deals. I believe these doubts are not unfounded. In addition, it is suspected that many of the restructuring deals were back-end loaded, namely, debtors only need to pay a small amount up-front and agree to pay the rest of the money later on, usually in several payments. It remains to be seen whether or not these debt repayments actually materialises. Another point of concern for the private banks is the fact that the TAMC prohibits state-owned AMCs from being the lead creditor in multi-creditor debt restructuring negotiations. This meant the private banks have to shoulder some additional burden of managing the whole restructuring negotiations, even if their total lending is small relative to other state-owned creditors. The gain (or loss) sharing is scheduled in year 5 and 10, but the expenses incurred as a result of these asset management activities goes straight into the banks’ profit and loss account every year. No wonder why some of the banks are getting somewhat reluctant in becoming the lead creditor! Moreover, it is speculated that the TAMC, in an attempt to meet their ambitious target, was directly negotiating several restructuring deals with the debtors – without notifying the creditor banks as previously agreed. The creditor banks, especially private banks which are more concerned about the terms of the restructuring and the resulting haircuts, disapprove of this practice. As a result, there seemed to be some increased tensions among the parties involved. The law which legitimises the TAMC outlines the profit and loss sharing structure between the TAMC and the financial institutions (Articles 47 - 52). The financial institutions would absorb the first 20 per cent loss, while the next 20 per cent loss would be shared equally between the TAMC and financial institutions. Any losses over the 40 per cent threshold will be borne by the TAMC. As one can see, since the originating banks are only responsible for up to the first 20 per cent plus half of the next 20 per cent, it is the people’s tax money that is at risk if the TAMC faces huge losses. A major criticism of the TAMC law is that the TAMC committee is given too much power and there is no oversight of the committee.10 The committee has the power to authorise and approve all kinds of debt and business restructuring, asset sales, and liquidation of debtors, as long as they have acted in a “careful and professional manner” – which is sometimes difficult to assess. The TAMC Committee, managing director, and other officials are well protected by professional immunity as specified in Article 28. They shall not be held responsible for their activities, if they have acted in a careful and professional manner. However, this immunity provision would not apply if they violate the law, are dishonest or guilty of gross negligence. In spite of the summary powers of the TAMCs and the opportunity to clean up their balance sheets, many banks were not too enthusiastic about the scheme and tried to 10 Source: Bangkok Post newspaper, November 25, 2001. On the power of the TAMC, Dr. Ammar Siamwalla also noted that the TAMC was not unlike the FRA in its role as an asset disposal unit. But whereas the FRA was in charge of disposing of financial institutions’ assets, with its buyers still having to go collect on the loans given to the debtors, TAMC will itself directly deal with the debtors, in many cases, if not in most, actually foreclosing on properties. Consequently, unlike the FRA, a key feature of the TAMC law is to empower it to grab these assets. Actually, there is nothing wrong with this as long as TAMC is doing its jobs openly, professionally and accountably. 24 speed up their restructuring efforts and finalise the deals prior to the cut-off date (transfer date) in order to reduce the amount of NPLs which needs to be transferred to the TAMC. The value of loans transferred from private banks fell short of expectations, which many observers put down to fears that the TAMC will go soft on well-connected debtors. Besides, Thailand’s privacy laws makes it impossible for outsiders to evaluate the TAMC’s degree of toughness on each debtor. At present, there are approximately 12 per cent of NPL in the banking system. NPL re-entry are occurring every month – but not at a worrying rate. To conclude, the existing bad loans problems in Thailand are beyond the point where the work of TAMC could make any real difference. The greatest worry now is that TAMC performs badly, either unprofessionally through irregular practices, or does not protect public interest well enough. If this happens, it is the taxpayers who will eventually pay for the past and present mistakes of those who are now handling the country’s NPLs. (b) ‘30-baht’ Health Care Scheme Another ambitious Thaksin Government policy is to provide universal health services and facilities, capping each hospital visit at 30 baht, in order to reduce the overall cost to the country and the people in acquiring health care. This is part of the long-term government plans to reform the health service system to provide health benefits comparable to those of the social security system to all Thai citizens for free or for a small co-payment. It is considering the possibility of merging all public health benefit programs into single or dual health funds. The Universal Health Care Coverage also allows private health care providers to participate in the program, with the hope that their participation would give more choices to the people and increase the quality and efficiency of the system. The government proclaimed that since April 1st, 2002, all Thai people has been guaranteed equal access to a nationally acceptable standard of health care. The Scheme works this way. All Thais over 13 years of age who do not currently receive other forms of Government-assisted health insurance11 are entitled to join this ‘30-baht’ program in which they are (supposed to) be able to get most kinds of medical treatment while paying only 30 baht each time. Those citizens who are not government servants or employees who are already covered by the government medical expenditure scheme, and private workers who are not covered by private insurance, and poor citizens who are provided with free medical care cards, will be given ‘Gold Cards’ to receive comprehensive medical services for a charge of 30 baht (less than 70 US cents) each time. The Government will pay 1,052 baht for each person registered at a particular hospital (whether public or private). The program covers necessary vaccinations, medical treatments, (except for the kidney dialysis which is extremely expensive), pregnancy care and delivery, and dental care. In December 2001, the Public Health Ministry has extended its 30-baht health care scheme to cover anti-retroviral drugs for HIV/AIDS. In the early stages, the scheme would cover 6,000 – 7,000 AIDS sufferers. A Committee would work out a budget management plan and criteria for deciding who should get the drugs. However, 11 Such as the Social Welfare Scheme for the poor, Voluntary Health Card Scheme, Civil Servant Medical Benefit Scheme, Social Security Scheme. 25 provincial Committees may decide to give different rates of budget to the contracting unit for primary care for each population group in the areas depending on the health conditions of each group. The ministry said its budget on AIDS would be increased to more than 1 billion baht, of which 42 per cent would go on prevention, 39 per cent on treatment, and the rest on information and research. This is one of the most popular public programs under the new government. The idea of providing universal health services for a very nominal fee (almost free) is a good one, especially for the poor. But the actual practices or implementation of this policy of this government have several flaws. The followings are some of the flaws: • This 30-baht Scheme does not target the poor only but applies to everyone who is not public servants, workers who enrolled in social security scheme, and those Free Medical Card holders. This wastes resources, creates moral hazard for the overutilisation of health services, and disturbs good practices of both the patients and health providers. • The present health care services system in Thailand is already functioning well, or at least not functioning too badly. The public hospitals or health clinics already charge reasonable fees for various medical services commensurate with the true costs of treatments. Those with ability to pay can go to private health care services; low-income households can buy low-cost health insurance cards; poor households can apply for Free Medical Service Cards; and so on. There are better ways in which to use several billion baht of government budget to provide health services for those who need them most. • The 30-baht Scheme affects the behaviour of both the patients and health providers in a certain way. For example, as the first receiving hospital has to take care of the patient throughout the treatment episode, if expensive specialised services in other hospital are need, the first receiving hospital may be reluctant to refer its patient there for fear of having to bear additional burden of costs. The cost comparison between different medical schemes may disrupt normal behaviour that is not efficient. • There is a natural constraint to the provision of medical services under this 30baht Scheme. Limited supply of medical services under low price will eventually bring about rationing and queuing of those services. Indeed, because of the possibility of the system correcting itself through service rationing and queuing, the state can even set the price lower than 30 baht per visit. • It is obvious that the government recognises the political popularity of this policy, and is willing to go through with it. But eventually the welfare of the whole population could be adversely affected by this market-distorted policy than is helped by it. (c) The Village and Urban Revolving Fund Another election promise which has become one of the earliest implemented policies of the Thaksin government is the establishment of the One-Million Baht Village and Urban Revolving Fund. Every village in the whole kingdom was 26 promised one million baht each from the Thaksin government as a loan to that village to use in a project or activity that generates income, employment and better livelihood for that village. This loan will remain in the village without having to return to the government unless it is clear that the village administrators were not able to make the proper use of it. This loan could be further lent out to households or individuals in the village for investment purposes. This loan can also be combined with another villagebased policy called ‘One Village One Product’ which is the government policy to encourage village or group of village to develop at least on local product based on traditional indigenous expertise and local know-how that can be sold or marketed in larger markets outside that village (even nationally or internationally). 12 The government is further prepared to provide additional assistance in terms of appropriate modern technology and new management techniques to market such local products from the village to domestic and international outlets through a national or international retail network or through its internet website (see <http://www.thaitambon.com>. The government believes that the overall economy would gain momentum through increase investments and local spending. By early March 2002, 71,578 Village and Urban Revolving Funds (69,960 villages and 1,668 Urban Communities) have been set up. One million has been transferred into each account. This accounts for 95.6 per cent of the government’s target of 74,881 Funds. The rationale for this policy is the need to build a strong local network of people who have the right political mindset and culture which is more independent and less hierarchical. Simply put, people should be willing to help one another rather than wait for government assistance, otherwise the program could be creating problems at a local level. At present, the Department of Community Development in the Ministry of Interioris the only government authority responsible for monitoring and measuring the performance of this program. Some feel that this arrangement is inadequate as it is suspected that some village fund do not have sufficient planning and monitoring for credit extensions, allowing locals to borrow to buy luxury items such as mobile phones, motorcycles, or even use the money to gamble. Moreover, the low interest (1 per cent) of the VURF is also very attractive and has caused some villagers to churn away from their village’s own savings co-operative. If this practice continues, the local savings co-operative may have to wind down its operations, and it would be quite difficult to rebuild it again once the VURF Scheme is phrased out in 2004. The government would also like to see this VURF as part of the Sufficiency Economy where each community at the grassroots level produces for personal consumption first and then sells excess production to augment income at the family level. Villagers are encouraged to join together in conducting economic activities at the community level, accelerate the development of small- and medium-scale entrepreneurs, provide access to domestic and overseas markets in order to systematically strengthen the income creation process for the people. The way this VURF works is that National VURF Committee and provincial VURF Committees will be established. Villages and Urban communities are encouraged to 12 The government often cited that it got the idea from Oita, Japan, which started off as a very poor village but later became a national success story following the implementation of the ‘One Village One Product’ project 27 set up local councils to plan and oversee the management and distribution and fund, and approve local projects before forwarding them to the Government Savings Bank (GSB) to be reconsidered. Once the project is approved by the GSB, the money for each project would be transferred. Fund Council’s committee members receive no compensation but have to be responsible for making approval decisions for all the loans, setting appropriate interest rates, and collecting all debt repayments – which could be rather burdensome for them. Initially the government required 15 elected local people to become committee members in each council, but they later relaxed this requirement to a range of 9-15 elected locals instead. This is because it can be somewhat difficult to find enough numbers who are willing to get involved in this difficult, time-consuming, and risky tasks. This program limits each individual borrowing to 20,000 baht and the amount must be paid back in one year’s time. Once a village distributed all of its one million baht to the local borrowers, additional lending is prohibited until the Fund receives at least 20 per cent of the total debt repayment. Interest level is not specified by the government, the local Fund Council can determine the appropriate interest applicable to different types of loans depending on the loan’s objectives and repayment schedule. In March 2002, Dr. Chalongphob Sussankarn, the President of Thailand Development Research Institute (TDRI), the country’s well known think tank, commented13 that the government’s ‘grass-root funding program’ is theoretically beneficial, but is facing several obstacles in practice because it cannot encourage the grass-root population to lead the economic recovery process. In addition, the system is not exactly marketdriven and hence may lead to business failures that could bring about another problem at a national level. Since most of the lower income population in Thailand has limited purchasing power and significant income inequality, the funding from the government has to pass through the same old political-business groups. As a result, it might not yield the right ingredients for success, similar to what has happened in the past where the government introduced several unsuccessful projects in the rural areas. Therefore, adequate performance measurement and continuous monitoring should be emphasised in order to ensure the effectiveness of these programs. A strong, independent, and transparent local committee is also a crucial factor. The fact that the government has relied on Keynesian economics – that is boosting expenditure with the hope that it would in turn boost income may not be the ideal solution during the economic crisis such as this one. If the problem of the country is structural, demand management may not help. The country needs structural change, in terms of infrastructure and means of production, to make it more competitive internationally. This is a factor which Dr. Chalongpob feels the government is lacking. Mr. Paiboon Wattanasiritham, a well known leader in non-governmental organisations stated that this VURF program has its positive and negative sides. The possible negative outcomes include: 13 Source: Krungthep Turakij newspaper, March 25, 2002 (in Thai). 28 • • • • “Bubble” at the grassroot level due to the huge economic stimulus (similar to the bubbles at the national level during the pre-crisis period where foreign capital inflows were very high) people who receive easy-money may not be careful in spending it the scheme could weaken the local community, making it accustomed to seeking help from outside rather than build a strong internal network. Treating money as the most essential ingredient of development, not people. The possible positive outcomes are: if well-managed, the program could create a structural change in the local economy and may lead to numerous job creation and strengthen the local community, both socially and economically. A World Bank Report14 suggested that block grants and other anti-poverty interventions targeted to the poorest villages are likely to be a better use of public funds than universally distributed programs, at least from an equity perspective. It is difficult to judge the usefulness of the VURF since, on one hand, part of the money actually goes into developing the skills of the local people. On the other hand, it could also create ruptures in the local community. In addition, some communities could still have local Mafia or political groups who may try to control the distribution of the funds. (d) Debt Moratorium to Small Farmers The Government has also initiated a policy to immediately grant a grace period for individual small farmers for both interest and principle payments for 3 years, to relieve their debt burden as a part of a comprehensive reform of the traditional farm economy to be more viable and self-sustaining in the long term. The ideas of giving or granting debt rescheduling or even debt forgiveness to small farmers for a long time and in all governments, but thus far no government was bold enough to implement it. Critics commented that the need for debt moratorium indicates that people in the rural areas are spending more than they can afford, just like the people in the metropolitan areas. They tend to use their extra income to finance their debt obligations instead of generating additional economic wealth. The government provides two options for the farmers: (1) Pure debt moratorium for 3 years The government will pay the interests for loans of all the farmers who chooses this option (2) Debt Reduction program The BAAC will reduce the interest rates changed on loans to the farmers. The reduction would depend on the credit status of the farmers. Credit status which are considered above-average are divided into 3 levels – excellent, very good, 14 Poverty and Public Policy 29 and good. ‘Excellent’ borrowers would receive higher interest cuts than ‘good’ borrowers. By September 2001, 95 per cent of the eligible farmers have joined the program. 1.1 million farmers opted for pure debt moratorium option, while around 1 million farmers chose to join the debt reduction program. There are concerns that the moral hazard problem, already reflected in the large number of strategic NPLs in the country, would spread to the grass-root level as well. Imagine a case where two farmers borrow the same amount of money from the government’s bank. Farmer A is a good farmer who is diligent and disciplined. He used his loan well and was able to recoup his investment within the stipulated period of time, pay his debt to the government’s bank, and make plans for his agricultural improvement and expansion. Farmer B is opposite. He used his loan badly, spending it on consumer goods rather than on investment. When the time comes to pay back the debt, he is unable to do so. Now the government came out with a policy to help Farmer B while Farmer A receives nothing from the government at all. This not only distorts good economic decision making and destroy good ‘debt culture’, it has the effect of rewarding the indigent and punishing the diligent. This is not saying that all indebted farmers are indigent—some indeed are afflicted by natural and market calamities, but the incentive packages should help both farmers equally. If Farmer B is to receive assistance from the state, similar assistance should also be made available to Farmer A. This is the basic idea that should govern the way the government gives a debt amnesty to small farmers. It does not seem that this idea lies beneath the debt moratorium policy of the current government. (e) The People’s Bank15 : a microcredit program run by the GSB Actually this idea was already conceived by the previous government under the leadership of the Democrat Party, but they did not have the opportunity to operate it. When the new government came into power, this idea was independently developed and expanded. In an effort to ensure better and improved access to banking facilities and resources for low income citizens to enhance their capacity to increase their income from self-employment, and eventually reduce their dependence on organised and punitive money market sources, the government’s ‘People’s Bank’ program commenced its operation on June 25, 2001. It is very easy to become a member of this program, one only needs to have a contactable address and a determination to start self-employment, plus a savings deposit account at the Government Savings Bank (GSB). Apart from requesting for loans to facilitate self-employment, members can use all types of deposit services of the bank and can also receive regular employment training and advice. The GSB will consider each loan application after the deposit account has already been opened for two months, and will determine the appropriate amount of loan. The loans can be used as working capital in self-employment, to repay (employment-related) personal debts incurred elsewhere, or for use in necessary day-to-day expenditures; on the 15 This is different from Krung Thai Bank’s Community Bank Program which complements the government’s People’s Bank Program. KTB’s program focuses on customers with higher borrowing needs, especially startup manufacturers. The loan offers are up to 50,000 baht each, with up to 3 year repayment terms. 30 condition that borrowers are credit worthy enough. At present, the first batch of loan to each person is limited to 30,000 baht (double from its original limit of 15,000 baht), while the second batch of loan has a higher cap of 50,000 baht – but this amount could be higher provided that there is adequate collateral. Interest to be charged on these loans is fixed at 1 per cent per month. Borrowers can repay both the principal and the interests on a monthly basis, with repayment terms varying from 13 to 37 periods (months). Both personal guarantees and asset collaterals are accepted in this program. As of February 15th, 2002, there were approximately 500,000 members in the program, of which approximately 70 per cent have submitted loan requests and 83 per cent of these loan requests have been approved – totalling around 4,000 million baht. Forty per cent of members are from the Central region, 29 per cent from the Northeastern region, 18 per cent from the Northern region, and 13 per cent from the Southern region. It is reported that approximately 3,000 new members are joining the program each month. Despite the fact that the stated 1 per cent per month interest rate seemed low, the principal that is used to calculate the interests does not reduce with each debt repayment. Therefore, the real interests that the borrowers have to pay are much higher than a simple 12 per cent as some might understood. As it turned out, the members who borrowed from this program had to pay approximately 22 per cent effective interest per year. The People’s Bank argued that there was a need to charge high interested because the effective cost of the Bank in providing loans to the members is approximately 18 per cent per year, as it has to incur a lot of expenses in hiring 500 new staff and motorcycles for use in collecting the debts. In addition, the loans were granted to retail borrowers who are mostly considered to be in a high-risk category, hence the Bank need to account for that in the interest charges. This interest level is still lower than credit card interests (approximately 25 per cent per year) or interests charged by illegal loan sharks (which can run up to 100 – 300 per cent per year). The matter was investigated by the Senate and the Senate Advisory Committee. The investigation concluded that the Bank’s interest calculation methodology was confusing to the borrowers and that the Bank should return at least half the interest collected to the borrowers. However, the People’s Bank has yet to change its interest calculation methodology. There were several problems encountered by program administrators such as: • • • • • • Members do not fully understand the Program’s criteria and conditions. Members do not have continuous savings stream, resulting in lack of funds for future employment capital. Members cannot find acceptable collateral/guarantor. Members have too much debt ‘outside the system’, and some of them still have high outstanding debt obligations with financial institutions. Members do not have adequate planning on how to utilise the loans granted in improving their employment status. Members misuse the loans, or save less once the loans were granted. 31 • Members move residence frequently, and bank representatives have trouble locating them. Despite these problems it must be admitted that this People’s Bank is a great help to the poor or near-poor. Without state intervention, poor borrowers with little or no collaterals would have little chance of borrow from commercial banks. So, this intervention is to supplement normal functioning of the market rather than to add obstacles to it. 6. Summary, Conclusions and Policy Implications In this paper I have tried to address the issues of the dichotomy or trade-off between economic growth and promotion of social welfare in the context of the development of Thailand in the last 40 years or so. I have argued that the Thai government has adopted free-market approach to economic development with the private sector playing the leading role in private investment and the public sector providing institutional and infrastructure support. This development approach has been beneficial to Thailand and its people in the past 40 years, as can be seen by the rapid rate of economic growth, the rate of increase of household and individual income, and the subsequent reduction in poverty. As poverty reduction is a direct consequent of economic growth, the government was under no pressure to institute specific antipoverty policies that directly attack remaining poverty. The recent economic crisis that struck in 1997 has reversed the trend of poverty decline, as well as the slow improvement in income inequality, making the government more conscious about the effects of economic growth and its impacts on social welfare. The development policies of the current government in Thailand have taken into account various measures to increase social welfare of the Thai people. However, many of these policies measures are inefficient and wasteful as they distort the working mechanisms of the market. It is still important that the government maintains satisfactory economic growth through good macroeconomic management, and use public resources more efficiently by the better targeting of the poor and the better delivery system of public expenditure. This paper also discussed how the crisis started in Thailand and how the government had dealt with the most severe economic problems in its recorded history. We have looked at some of the more important macroeconomic indicators that show the state of the economy such as the growth in GDP, the production conditions in both agricultural and manufacturing sectors, the household consumption levels, the price levels, and so on. We also looked at the impact of the crisis on the welfare or wellbeing of the people. Foremost in our concern is the employment and unemployment situations facing the Thai households during and after the depth of the crisis. It is obvious that welfare and well-being of most Thai people have declined, although the severity of the problem had not gone beyond our worse expectation. There are several explanations for this resiliency in the life of the Thai people. One is the existence of the family ties that bind members together in time of trouble and crisis. The other is the reasonable public policy to help the public in needs. However, there is a danger in trying to raise welfare of the people through inefficient economic means. This wastes resources and may not achieve the twin goals of reasonable rate of economic growth and satisfactory level of social welfare. 32 The economic crisis of 1997 has taught the Thais many lessons. One is not to get carried away by the appearance of rapid economic growth, and the other is not live beyond one’s means. The new Philosophy of Sufficiency Economy which stresses moderation, constant awareness and adjustment to surrounding environment, and careful management of risk has become a guiding principle of present and future development of Thailand. However, there is still much to do in reducing the remaining poverty and income inequality. This is the main tasks that any government in Thailand will have to tackle. The present government of Thailand under the leadership of Mr. Thaksin Shinawatra came into power with enormous political support from the Thai population. This makes it easier for him to carry out economic policies that continue to get the Thai economy out of recession and strengthen its macroeconomy. Despite the earlier perception that his government was inward-looking and anti-foreigners, the true nature of this government is very much outward-looking and market-oriented. 16 This is good and should help future economic position of Thailand. However, this government is laden with several election promises to undertake several welfareoriented policies that are very costly, inefficient, and unlikely to fulfil the objectives of raising the welfare of the people in the long run. The creation of huge public debts to finance these policies can become the Achilles’ Heel of this government. In the final analysis, it is always proper to refer to the Philosophy of Sufficiency Economy to find an answer to development policies that give balance between sustainable economic growth and adequate social welfare and protection. 16 On the analysis of foreign economic policy of the new government, see Medhi (2001). 33 References Ammar Siamwalla (2000), ‘AMC: An Idea Whose Time Has Gone’, paper from TDRI Website <http://www.tdri.or.th>, September 28, 2000. Ammar Siamwalla (2001), ‘Conceptualising the Process of Cleaning Up Balance Sheets in Post-Crisis Thailand’, TDRI Quarterly Review, June 2001. Ammar Siamwalla (forthcoming), ‘Anatomy of the Thai Economic Crisis’, in Peter C. Warr (ed.), Thailand Beyond the Crisis, London: Routledge, forthcoming. Ammar Siamwalla and Orapin Sobchokchai (1998), ‘Responding to the Thai Economic Crisis’, Bangkok: UNDP, 1998. Bank of Thailand, various years, Economic and Financial Statistics. Behrman, Jere, Anil B. Deolalikar, and Pranee Tinakorn (2001), ‘The Effects of the Thai Economic Crisis and of Thai Labour market Policies on Labour Market Outcomes: Executive Summary, TDRI Quarterly Review, vol. 16, no. 3, September 2001. Kakwani, Nanak and Medhi Krongkaew (1996), ‘Poverty in Thailand: Defining, Measuring and Analysing’, paper presented at the 5th Biennial General Meeting of the East Asian Economic Association in Bangkok, October 25-26, 1996. Medhi Krongkaew (2001a), ‘A Tale of an Economic Crisis’, in Chu Yun-Peng and Hal Hill (eds.), Social Impacts of Economic Crisis in East Asia, London: Edward Elgar, 2001. Medhi Krongkaew (2001b), “The New Foreign Economic Policy of Thailand and Its International Implications”, TDRI Quarterly Review, September 2001. National Economic and Social Development Board, various years, National Income of Thailand. National Statistical Office (NSO), various years, Socio-Economic Surveys (SES). Sauwalak Kittiprapas (1999), ‘Social Impacts of Thai Economic Crisis’, in Social Impacts of the Asian Economic Crisis: Thailand, Indonesia, Malaysia and the Philippines, Bangkok: TDRI, March 1999, pp. 17-46. Somsak Tambunlertchai (1999), ‘Social Impacts of Economic Crisis in Thailand’, Seoul: Korea Development Institute, 1998. World Bank (1980), Income Growth and Poverty Alleviation, World Bank Country Study, June 1980. World Bank (1999), Coping with the Crisis in Education and Health, Bangkok: World Bank Bangkok Office. World Bank (2000), Social Capital and the Crisis, Bangkok: World Bank Bangkok Office. 34 Box 1: Structure of the Thai Economy in a Nutshell Thailand was a low income, low growth economy at the end of the 1950s. Close to 85 per cent of the total population were engaged in agriculture of which rice the major agricultural product. Its main exports consisted of rice, rubber, teak and tin. Then its leaders decided to move the country quickly along the path of modern economic development emphasising import substitution and later export promotion. With the help of the World Bank in preparing its first national economic development plan, Thailand adopted market approach to economic development, that is to say, it allowed the private sector to initiate their own investments with the government taking essentially non-interventionist approach but providing necessary incentives and basic infrastructure, legal and business frameworks. Thailand today is a middle-income, developing economy. It has come this far through agricultural diversifications where several more crops such as maize, cassava, sugarcane were added to the list of agricultural expansion and exports. Import substitution industrialisation started with textile and consumers products, then moved up garments, electrical appliances, electronic components, processed food, and jewellery. While the majority of the population is still engaged in agriculture (about half in 1996), the contribution of agriculture to GDP has fallen from about 40 per cent at the launch of Thailand’s first national economic development plan in 1961 to about 10 per cent today, while manufacturing has increased its share from about 8 per cent to 30 per cent during the same time period. The services sector has remained relatively unchanged around 50 per cent. The rest of GDP is made up of contributions from other industrial activities such power and utilities, and transportation. Three major factors helped explain the rapid economic growth of the Thai economy in the latter half of the 1980s: the extraordinary increase in exports after devaluation of the baht in 1984; the increase in (the second wave of) foreign direct investment from Japan after the Plaza Accord in 1985, and the increase in earning from foreign tourists from 1987. The country has begun to suffer from shortage of infrastructure prompting the government to play much greater role in the provisions of infrastructure, the role made possible by the fiscal surplus in a booming economy. The strength of the economy also enabled the Thai authorities to liberalise its financial system quickly, opening the country to more competition (and higher risk) from abroad. The growth of the economy raised the average income the people across the board, resulting in drastic reduction in the incidence of poverty to around 10 per cent in 1994. Thailand suffered domestic political turmoil in 1991 and again in 1992 which saw its growth slowed. The problems erupted again in 1996 in the aftermath of serious floods throughout most parts of the country, when the inflation soared past 7 per cent, its exports failed to increase due to the loss of comparative advantage in low-cost manufacturing products, its current account deficits worsened to about 8.5 per cent of GDP, and its property market in trouble after too aggressive expansion in the late 1980s. The slow down in export growth in 1996 and the first quarter of 1997, coupled with the financial difficulties of many banks and finance companies put a great deal of pressure on the Thai monetary and fiscal authorities to maintain economic stability, and erode the confidence of investors, domestic as well as foreign. The continued 35 high level of current account deficits also put pressure on the exchange rate of the baht which was effectively fixed with the US dollar. Many speculative attacks on the baht convinced the government leaders that the defence of the baht fixed exchange rate with the US dollar was untenable. This led to the flotation of the baht in early July 1997. This is the now well known beginning of the Thai economic crisis that we are discussing elsewhere in this paper. 36 Table 1(a): Summary Objectives of National Economic and Social Development Plans: Plan 1 to Plan 4 Plan 1 Plan 2 Plan 3 Plan 4 (1961-1966) (1967-1971) (1972-1976) (1977-1981) 1. Economic growth and 1. Economic growth and 1. Economic growth and 1. Economic expansion expansion expansion rehabilitation for higher growth 2. Promotion of 2. Economic and 2. Economic 2. Reduction of industrial production financial stabilisation stabilisation economic and social gaps among people 3. Promotion of 3. Promotion of private 3. Solutions to balance 3. Reduction of investment and investment in the of payments problems population growth rate competition in the industrial sector and improvement of private sector quality of the population and domestic employment 4. Promotion and 4. Raising the income 4. Conservation and maintenance of social and standard of living improvement of national justice and income distribution environment and of the rural people resources 5. Maintenance of 5. Increase employment 5. Maintenance of national security of the people national security 6. Reduce population growth rate 7. Expansion of public services 8. Maintenance of national security Source: NESDB, various plans documents 37 Table 1(b): Summary Objectives of National Economic and Social Development Plans: Plan 5 to Plan 8 Plan 5 (1982-1986) 1. Rehabilitation and strengthening of economic and financial conditions of the country Plan 6 (1987-1991) 1. Economic growth and expansion Plan 7 (1992-1996) 1. Maintenance of appropriate rate of economic expansion leading to sustained and stable growth 2. Structural adjustments and improvement of economic efficiency in both agricultural and industrial sectors to increase output 2. Employment generation 2. Greater distribution of income and development to rural areas and countryside 3. Development of structure and distribution of social services 3. Economic, financial and fiscal stabilisation 3. Acceleration of human resources development, development of quality of life, the environment and natural resources Plan 8 (1997-2001) 1. Promotion of potentials of individuals both physically and intellectually with good health, knowledge and skills for gainful occupation, and ability to adjust and adapt to changing economic, social and administrative conditions 2. Development of stable social environment; promotion of the strength of family and community leading to the support of human potentials and quality of life, including the possibility of greater community participation in national development 3. Economic development of the country which is stable, secure and balanced, promoting the opportunity to 38 Plan 5 (1982-1986) Plan 6 (1987-1991) 4. Poverty alleviation in backward rural areas 4. Improvement of human quality to develop progressive, peaceful and just society 5. Coordination of economic development and national security 5. Preservation of national identity, culture, and good values 6. Reforms of government development administration and the redistribution of assets 6. Raising the standard of living and quality of life of people in rural and urban areas Sources: NESDB, various plans documents Plan 7 (1992-1996) Plan 8 (1997-2001) develop human potentials to participate in development and to receive fair results of development 4. Utilisation and preservation of natural resources and the environment in support of the development of the economy, society, and sustainable quality of life 5. Adjustments of administrative and management systems to allow greater private organisations, private sector, communities and general public to participate more fully in development process of the country 39 Table 1 (c): Objectives of the 9th National Economic and Social Development Plan, 2002-2006 In order to ensure that Thailand’s development follows a common vision under the sufficiency economy philosophy and lead to an evolution of an ideal Thai society in the future, the 9th Development Plan (B.E. 2002 - 2006) has outlined the objectives and main goals of the country’s development as follows: Objectives (1) To stimulate economic recovery and promote stability in the system by: Strengthening the financial system Enhancing and stabilising the government’s fiscal position. Restructuring the grassroot economies, to make them more independent Increasing the efficiency of the whole economic system to make it more competitive, and able to meet the challenges of the modern recovery (2) To prepare the foundation for the country’s development by: Developing human resources, carrying out educational and health care system reform, building a functional social safety net Strengthening the local communities and networks to facilitate sustainable rural and city development. Ensuring appropriate management of the environment and natural resources, and continuous developments in science and technology which is appropriate in the Thai context. (3) To ensure good management in all levels of the Thai Society as a foundation for the efficient development of the country by: Ensuring transparency and allowing for regular audits Reforming the public sector’s management system Promoting proper management in the private sector Encouraging the public’s participation in the development process Building a responsible political system which focuses on meeting societal needs and reducing corruption (4) To solve the poverty problem and elevate Thai people’s potentials and opportunities to become independent by: Providing equal opportunities in the form of educational services and social welfare for all Creating employment, thereby increasing income and upgrading people’s quality of life Allowing local communities and local people to participate in the development and adjustment of public policies to enable better problem-solving processes 40 Box 2: The Philosophy of Sufficiency Economy: Thailand’s New Guiding Development Principles The economic crisis of 1997 affects everyone in Thailand even His Majesty the King. Seeing many of his subjects suffering from the pain of economic crisis, he gave his kind words of advice that Thai people should change the economic philosophy of their livelihood so as to be able to cope with present economic adversity and withstand future economic insecurity. His Majesty’s words has become known as the Philosophy of Sufficiency Economy, and has been used as the guiding principle for the drafting of the current 9th National Economic and Social Development Plan. This philosophical statement can be summed in just one paragraph, in Thai, and the following is the translation from that paragraph: • Sufficiency Economy is a philosophy that guides the livelihood and behaviour of people at all levels, from family to community to the country, on matters concerning national development and administration so that the ‘middle way’ is observed, especially economic development that keeps up with the world of globalisation. Sufficiency means moderation, reasonableness, including the need to build reasonable immunity system against any shocks from the outside as well as from the inside. In so doing, one must rely on intelligence, attentiveness and extreme care to use all kinds of knowledge in making plan and in carrying out every step of its implementation. And at the same time we must build up the spiritual foundation of all people in the nation, especially state officials, scholars, and business people of all levels, to be conscious of moral integrity and honesty, and to strive for appropriate wisdom to live the life with forbearance, diligence, self-awareness, intelligence, and attentiveness, so as to maintain the balance and readiness to better cope with rapid physical, social, environmental and cultural changes from the outside world. The above philosophical statement has lent itself to several interpretations by various groups of people. First of all, we can dismiss outright the extreme interpretation that self-sufficient economy means complete self-reliance economy or autarky. An autarchic system is a system whereby a country intends to rely on itself or its people to produce all it can without depending on others. It may want to do that voluntarily (cutting off contacts with outside world) or has to do that by necessity (because it is incapable of generating contacts with outside world). In His Majesty the King’s own words, “…This self-sufficiency does not mean that every family must grow food for themselves, to make clothes for themselves; that is too much. But in a village or subdistrict there should be a reasonable amount of sufficiency. If they grow or produce something more than they need they can sell them. But they do not need to sell them very far; they can sell them in nearby places without having to pay high transport costs”. Some people have attempted to link this new economy with the so-called ‘Gandhian Economy’ along the line proposed by Mahatma Gandhi of India. Gandhian economy is an economy based on family-level or village-level small-scale enterprises and traditional methods. It may be appropriate to India at that time when the people were poor and technology was limited. But in the modern time, this may be too restricted as the families may have to do many things by themselves using simple tools and 41 machinery (like using traditional spinning wheels to make cloth). Perhaps the basic idea of Gandhi’s simple life--the life not too encumbered by modern needs and modern technology, could make the life of Indian people happier. But in a much more open world of today, this self-sufficiency a la Gandhi is too extreme. We also often hear and see people trying to understand this new economy using the knowledge and applicability of Buddhism. In Buddhism, life, especially spiritual life, is enhanced by the cutting down of excessive wants or greed. True happiness may be attained when a person is fully satisfied with what he or she has, and is at peace with himself or herself. To strive to consume more would lead to unhappiness if and when the consumption is not satisfied or falls short of expectation. Self-sufficient economy in this context would be an economy fundamentally conditioned by basic needs, not greed, and restrained by conscious efforts to cut down consumption. This is probably acceptable insofar as it does not go so far as to reject welfare gains from consumption together. On looking back, it was discovered that His Majesty had talked about this issue of ‘Sufficiency Economy’ since 1974. In his usual birthday speech in December 1974, he wished that everyone in Thailand had ‘sufficient to live and to eat’ (Por You Por Kin). This was indeed a precursor to what we are now talking about in the sufficiency economy. His Majesty had followed up this issue by saying it again that “…The development of a country must be by steps. It must start with the basic sufficiency in food and adequate living, using techniques and instruments which are economical but technically sound. When this foundation is secured, then higher economic status and progress can be established”.17 This is very good and very clear because it has shown that His Majesty did not deny economic progress and globalisation which some people have interpreted his Sufficiency Economy to lead away from. Indeed the world globalisation (or in Thai, Lokapiwat’) is used in the statement on Sufficiency Economy that His Majesty has endorsed. The notion that Sufficiency Economy is anti-globalisation should be put to rest forever. Still there are attempts from various segments of the Thai population to separate or dissociate this New Economy from the realm of mainstream economics that stresses economic rationality and efficiency in resource allocation. It is very obvious that His Majesty’s Sufficiency Economy is not the type of economy that one can find in an ordinary mainstream economics textbook, but it would be inaccurate to interpret that this New Economy is the antithesis of the mainstream economics in every respect. Not so. I think we can still understand this new Sufficiency Economy within the framework of mainstream economics (of economic rationality and efficiency in allocative choices). The difference is not in the type, but in the degree or magnitude of economic behaviour. His Majesty had used the word ‘Middle Path’ or ‘Middle Way’ to describe the pattern of life that every Thai should lead, the life dictated by moderation, reasonableness, and ability to withstand shock. Can we find something in mainstream economics that best captures the spirit of this philosophy? 17 Information from Apichai Puntasen, ‘The King’s Sufficiency Economy and Its Interpretation by Economists’, paper prepared for the 1999 Year-End Conference organised by the Thailand Development Research Institute (TDRI), Pattaya, 18-19 December 1999. 42 I propose to use my own understanding of optimisation in economics to explain this New Economy. How? It is possible to see the Sufficiency Economy as consisting of two states of affairs. One is the inevitability of facing the globalised world where economic efficiency and competition are the rules of the game, and the other is the need to have economic security and capability to protect oneself from external shock and instability. In the first state of affairs which is the basic tenet in mainstream economics, we must always realise that there are opportunity costs involved with all decisions that we make. We can still gain from specialisation and division of labour because the opportunity costs of doing everything by ourselves will be higher. The laws of comparative advantage and gains from trade still work in today’s world. But it would be foolish to go all out to specialise without basic security, especially food and personal living security (shelter and clothing). This is when the second state of affairs in the new Sufficiency Economy comes in because it concerns the basic capability of the people in the country to look after themselves or take care of themselves. The optimisation principle applies when we seek to answer the question: How much of our time and energy should be devoted to the first and second state of affairs? In other words, how much resources should we allocate to producing for trade based on comparative advantage principle, and how much for basic security? The best mix between the two allocations would represent the optimal state of affairs. On the allocation of time for what economic purposes, His Majesty had suggested that we did not have to put all our efforts to an attempt to be a ‘tiger’. If I may be permitted to link this portion of His Majesty’s statement to the point I made about allout specialisation, one can see that there is conformity between the two concepts. The same conformity can be seen also in His Majesty’s further statement that the use of only one quarter of those time and efforts would be sufficient to attain self-sufficient economic status. His Majesty’s suggestion has indeed provided a starting point in my optimisation procedure. We need to study whether this one quarter time and efforts represents the optimal mix between the attainment of the first and second state of affairs. Some countries may need more, some less, but the relevant economic question is how we can get the optimal mix of resource allocation that satisfy economic growth and basic needs and security at the same time. Under the above economic framework, we can see that there is no conflict between what His Majesty has propounded and the possible interpretation under mainstream economic principles. One should notice the last clause in the Philosophy of Sufficiency Economy that His Majesty had approved. It says that ‘…(all the Thais) must posses integrity, honesty, and appropriate knowledge so as to be able to lead the life with patience, perseverance, diligence, wisdom and prudence, to maintain balance and be ready for the rapid material, social, environmental, and cultural changes from the outside world”. I would like to use the word ‘balance’ here to mean the optimal mix that I alluded to above. 43 Table 2: Household Income and Poverty Incidence, 1962/63 to 2000 Household income per capita (baht per year) Poverty incidence (%) Household income per capita (baht per month) Poverty incidence (%) 1962/63 1967/68 1975/76 1981 1986 1,601 2,490 4,206 9,008 10,233 57 39 33 24 29.5 1988 1990 1992 1994 1996 1998 1,051 1,413 1,887 2,321 3,008 3,448 32.6 27.2 23.2 16.3 11.4 12.9 Sources: NSO, Socioeconomic Surveys, various years. 44 Table 3: Incidence of Poverty, Whole Kingdom, New Series, 1988 to 1998. Period Percentage Poverty of the poor gap ratio Severity of Number of poverty poor in index million Percentage 1988 1990 1992 1994 1996 1998 32.6 27.2 23.2 16.3 11.4 12.9 10.4 8.0 6.8 4.3 2.8 3.2 4.6 3.3 2.8 1.7 1.1 1.2 17.9 15.3 13.5 9.7 6.8 7.9 Percentage change 1988-1990 1990-1992 1992-1994 1994-1996 1996-1998 -16.6 -14.7 -29.6 -30.2 13.2 -23.1 -15.0 -37.0 -34.7 14.1 -28.3 -15.2 -39.9 -34.6 7.9 -14.5 -11.8 -28.5 -29.6 15.8 19.7 10.8 22.5 2.6 16.5 1.0 22.3 6.4 Crisis index (for 1998) Expected value (for 1998) Additional information on poverty incidence 1999 2000 Percentage change 1998-1999 1999-2000 14.6 14.2 10.1 -2.7 Source: NESDB, "Poverty and Inequality During the Economic Crisis in Thailand", Newsletter of the Indicators of Well-Being and Policy Analysis Project, vol. 3, no. 1, January 1999; and Somchai Jitsuchon and Jiraporn Plangpraphan, 'An Inquiry into the Proper Measurement of Poverty in th Thailand', paper presented at the 26 Annual Conference of the Federation of ASEAN Economic Associations, in Bangkok, 20-21 December 2001. 45 Table 4: The Distribution of Income in Thailand Gini index 1975/76 1981 1986 1988 1990 1992 1994 1996 1998 1999 2000 0.426 0.442 0.496 0.489 0.515 0.536 0.521 0.516 0.509 0.531 0.525 Quintile1 Quintile2 Quintile3 Quintile4 Quintile5 Quintile5/ Quintile1 6.0 5.5 4.5 4.6 4.3 4.0 4.0 4.1 4.2 3.8 3.9 9.7 9.3 7.9 8.0 7.5 7.1 7.3 7.5 7.7 7.1 7.2 14.0 13.7 12.3 12.4 11.7 11.1 11.7 11.8 11.9 11.4 11.4 21.0 21.1 20.3 20.6 19.5 18.8 19.7 19.9 19.8 19.4 19.9 49.2 50.4 55.0 54.5 57.0 59.1 57.2 56.7 56.3 58.2 57.6 Source: Somchai Jitsuchon and Jiraporn Plangpraphan, 'An Inquiry into the th Proper Measurement of Poverty in Thailand', paper presented at the 26 Annual Conference of the Federation of ASEAN Economic Associations, in Bangkok, 20-21 December 2001. 8.1 9.2 12.2 11.9 13.2 14.9 14.2 13.8 13.3 15.2 14.9 46 Box 3: Does the government have a strategy or approach which refers to poverty reduction? In 1995, Thailand took part actively in the World Social Development Summit in Copenhagen. Five years later in 2000, those countries that attended the 1995 Summit were invited back to Geneva to report on the progress of the work done on social development in those countries in the past 5 years. In Thailand, the question that appears in the title of this box was asked to the Thai authority, and below is the answer to that question: The alleviation of poverty has been one of the objectives of the National Economic and Social Development Plans since the First Plan in 1961. But it was not until the Fifth Plan in 1981 that a special Development Plan for Rural Poverty was conceived and appended to the main Plan, giving poverty alleviation a special attention that never existed before. One year before that, the government under General Tinsulanond had set up the Rural Job Creation Program (RJCP), a public works program that combined rural employment generation and the construction of rural infrastructure. In 1987 another kind of public works-cum-employment program, the Green Esarn program, was instituted, this time directed at the poorest northeast region (Esarn is Thai for northeast). These, the RJCP and the Green Esarn programs, were the most prominent of the poverty alleviation programs. These were terminated in 1991 and 1992 and were replaced by a new rural development program called the Tambon Development Program, a Tambon being a government administrative unit at the sub-district level. In 1994 the Tambon Administrative Organisation (TAO) law was passed enabling the establishment of TAOs throughout the country in both rural and peri-urban areas. It is difficult to say how effective these programs have been. The evidence suggests that both the RJCP and the Green Esarn programs were pretty ineffective in directly reducing rural poverty. But rural development expenditures increased rapidly in the early 1990s, and the incidence of poverty in Thailand (by reference to a poverty line of a dollar a day) which rose from 8 per cent in 1975 to 10 per cent in 1985, then fell to less than 2 per cent in 1995 and (by reference to national poverty lines) fell from 33 per cent in 1988 to 11 per centin 1996. However income distribution in Thailand appears to have remained very unequal and poverty remains high in the Northeast region. Little attention was paid to distributional issues from the 1950s to the 1990s and there seems to have been an increase in inequality in the three decades up to 1992 offset to some extent by a reduction from 1992 to 1996. Income distribution remains highly unequal in Thailand with the Gini coefficient in 1996 being 0.50, high by Southeast Asian standards. Thus the reduction in absolute poverty has been due entirely to the rapid growth of the economy. The real GNP growth rate averaged just under 4 per cent per annum between 1960 and 1985 and 9 per cent per annum between 1985 and 1996. With research in Thailand suggesting that a 1 per cent increase in real per capita GDP leads to a decrease in poverty incidence of more than 1 per cent, it is not surprising that poverty incidence has fallen in spite of the rise in inequality. . 47 But there are sharp regional imbalances. In 1994, 18 billion baht (or 2 per cent of the then national income) directed at the poor would have been sufficient to bring them up to the nationally-defined poverty line. Over half of this (10.4 bn baht) would have had to have been directed at the poor in the Northeast region to push them above the poverty line. For, in spite of the Green Esarn program and even though poverty incidence fell between 1988 and 1996 more sharply in the Northeast region than in any other region, in 1996 poverty incidence in the Northeast was 19 per cent, still eight percentage points above the national average. In 1996 the Northeast region, together with the North region, accounted for over three-quarters of the poor although the two regions contained only a little over half of Thailand’s population. It is likely that to reduce poverty in the future will require programs targeted specifically at the poor since, at the end of the 1990s, the percentage shortfall of the poor from the poverty threshold (the Income Gap ratio) was rising, suggesting that it would be harder to push the remaining poor over the poverty threshold. Thailand is relatively under-urbanised relative to most middle income countries, with 60 per cent of the population being rural, although it needs to be emphasised that 60 per cent of the rural population live within 75 kms of an urban centre of at least 75,000 people. But more than four-fifths of the poor are in rural areas so that if programs targeted at the poor are to be implemented, they need to be mostly directed at the rural poor, though not necessarily at agriculture, since most rural incomes come directly from non-agricultural sources. As noted above, successive governments in Thailand have shown little willingness to adopt measures which will redistribute income towards the poor. However there are indications that there is now a greater political willingness to shift economic policy in such a direction. The 8th Five Year Plan (covering the period from 1997 to 2001) has been widely regarded as a social reform document in Thailand with a strong focus on the poor and under-privileged and the 8th Plan was accompanied by the introduction of a new Constitution in October 1997. This aimed to combine greater transparency and accountability with greater decentralisation (including the powers to borrow money) to local governments, although there are reports that the decentralisation of power is proceeding slowly. It is worth noting that this drive for reform withstood the strains arising from the financial crisis of 1997/1998. In 1997 real GNP fell by 0.4 per cent and then in 1998 it fell by more than 9 per cent. The crisis was caused principally by financial liberalisation and exacerbated by the (initially) too restrictive terms imposed by the IMF which were later relaxed. But instead of the onset of the crisis giving rise to a coup d’etat, some measures were taken to protect the unemployed and vulnerable groups. In spite of this, another million people sank beneath the poverty line and poverty incidence rose from 11 per cent in 1996 to about 13 per cent in 1998. The ultra-poor (those more than 20 per cent below the poverty line) were particularly badly hit by the rising price of food and it has been estimated that within a year of the onset of the crisis, the number of ultra-poor rose by almost a quarter. The incidence of poverty in the Northeast rose from 19 per cent to 23 per cent. Nevertheless the impact of the crisis was not as severe as initially feared as the government of Thailand and its donors, under pressure from civil society organisations, undertook a major social reform agenda. As a result of the crisis the pressure for poverty alleviation measures has grown rather than diminished. 48 An area where there is considerable uncertainty about the effects of the crisis is migration, but it is clear that much of the strain was borne by international migrants as well as by internal migrants returning to their villages from the urban areas. In the mid-1990s it was estimated that the number of foreign workers (mainly from Myanmar, Lao PDR and Cambodia) in Thailand was well over a million, most of these being illegal immigrants. At the onset of the crisis, the government of Thailand set a target of repatriating 300,000 workers by June 1998. Conversely it is not clear what the effect of the crisis was on the 150,000 Thai citizens working legally overseas and the many more illegal Thai emigrants. Source: Amara Pongsapit, Leader of the National Team to the follow-up meeting of the World Social Development Summit, in Geneva, June 2000. 49 Table 5: Percentage of Average Monthly Income of Household by Type of Income Type of Income Total Income Current Income 7 Money Income Income in kind Other Money 1/ Receipts 1975-76 100 98.9 1981 100 98.5 1986 100 99 1988 100 98.7 1990 100 97.2 1992 100 98.5 1994 100 98.9 1996 100 98.5 1998 100 98.2 1999* 100 98.5 2000 100 98.7 72.9 70.7 73.2 73.9 76 77.4 79.6 80.5 79.7 80.2 80.3 26 27.8 25.8 24.8 21.2 21.1 19.3 18 18.5 18.3 18.4 1.1 1.5 1 1.3 2.8 1.5 1.1 1.5 1.8 1.5 1.3 1/ Such as insurance proceeds, lottery winning and other windfall receipts. * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999 and 2000 Household Socio-economic Survey, National Statistical office 50 Table 6: Percentage of Average Monthly Income of Household by Source of Income Source of 1975-76 1981 1986 1988 1990 1992 1994 Income (Value : Baht) 1,928 3,378 3,631 4,106 5,625 7,062 8,262 Total Income 100 100 100 100 100 100 100 /TR> Wages 28.3 26.7 33.7 34.4 36.3 39 41.2 and Salaries Profits, 20.6 17.1 17.6 15.7 17.3 18.5 19.1 Non-farm Profits 19.3 20.8 15.4 15.9 15.7 12.6 11.1 from Farming Property 0.8 0.9 0.9 0.9 1.1 1.5 1.1 Income Current 3.9 5.2 5.6 7 5.6 5.8 7.1 Transfers Income 26 27.8 25.8 24.8 21.2 21.1 19.3 in-kind Other 1.1 1.5 1 1.3 2.8 1.5 1.1 Money 1/ Receipts 1/ Such as insurance proceeds, lottery winning and other windfall receipts. * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999 and 2000 Household Socio-economic Survey, National Statistical office 1996 1998 1999* 2000 10,779 100 12,492 100 12,729 100 12,150 100 39.9 40.2 41.1 42.4 19.9 18.5 19.2 18.5 11.9 11.2 9.4 9.6 1.6 1.9 1.9 1.5 7.2 7.9 8.6 8.3 18 18.5 18.3 18.4 1.5 1.8 1.5 1.3 51 Expenditure Type 1975-76 1/ 1981 1986 1988 1990 1992 1994 1996 1998 1999* 2000 Food 46.1 44.1 38.9 36.5 36.2 34.8 33.7 32.2 35.1 33.3 32.2 Non-food Total Consumption 2/ Non-Consumption 53.9 100 96 4 55.9 100 93.4 6.6 61.1 100 92.1 7.9 63.5 100 91.4 8.6 63.8 100 90.9 9.1 65.2 100 90.2 9.8 66.3 100 89.7 10.3 67.8 100 87.8 12.2 64.9 100 86.3 13.7 66.7 100 87 13 67.8 100 86.9 13.1 Total 100 100 100 100 100 100 100 100 100 1/ >1/ Excluded alcoholic beverages and tobacco products 2/ Such as taxes, gifts and contributions, insurance premiums, lottery tickets and other gamblings, interest, etc. * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999 and 2000 Household Socio-economic Survey, National Statistical office 100 100 52 Table 7: Percentage of Average Monthly Expenditure of Household by Expenditure Group Expenditure 1975-76 1981 1986 1988 1990 1992 1994 Group (Value : Baht) 2,004 3,374 3,783 4,161 5,437 6,529 7,567 Total 100 100 100 100 100 100 100 Expenditures Food and Beverages 1996 9,190 100 1998 10,389 100 1999* 2000 10,238 100 9,848 100 46.1 44.1 38.9 36.5 36.2 34.8 33.7 32.2 35.1 33.3 32.2 1 1.2 1.2 2 1.5 2.7 1.6 2.5 1.5 1.7 2 Tobacco Products Apparel and Footwear 2.8 10.1 2.4 7.3 1.8 6.2 1.9 6.2 1.5 5.8 1.7 6 1.2 5.4 1.5 4.8 1.2 3.5 1.3 3.9 1.2 3.8 Housing 16.9 20.6 23.4 24.3 22.4 21.9 21.9 20.3 21.4 22.2 22.2 Medical Care Personal Care Transportation and Communications 4 2.4 7.5 3.3 2.2 7.3 3.5 2.6 9.1 3.4 2.6 9.7 3.4 2.5 12.8 3.4 2.5 12.3 3.5 2.5 14.8 3.7 2.4 15.4 2.8 2.3 13.3 2.7 2.6 13.8 2.7 2.7 14.9 Recreation and Reading 2.3 2.3 2.4 2.2 2.3 2.3 2.2 2.2 1.7 1.7 1.8 Education 1.6 1.3 1.5 1.3 1.4 1.5 1.8 1.8 2.3 2.7 Miscellaneous 1.3 1.4 1.5 1.3 1.1 1.1 1.1 1 1.2 1.1 Non-Consumption 4 6.6 7.9 8.6 9.1 9.8 10.3 12.2 13.7 13 2/ Expenditures 1/ >1/ Included alcoholic drinks away from home 2/ Such as taxes, gifts and contributions, insurance premiums, lottery tickets, interest on debts and other similar expenses * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999 and 2000 Household Socio-economic Survey, National Statistical office 2.5 0.9 13.1 Alcoholic 1/ Beverages 53 Table 8: Current Income Share of Households by Quintile Groups of Household and the Gini Coefficient Quintile Group 1990 1992 1994 1996 1998 1999* 2000 1 10% 10% 2 3 4 5 10% 10% 5.9 -2.4 -3.5 9.3 13.2 21.2 50.4 -16 -34.4 100 0.429 5.4 -2.2 -3.2 8.9 13.1 20.7 51.9 -16.1 -35.8 100 0.445 5.6 -2.3 -3.3 9.1 13.6 21.3 50.4 -16 -34.4 100 0.431 5.7 -2.3 -3.4 9.2 13.5 21.5 50.1 -15.4 -34.7 100 0.429 5.9 -2.4 -3.5 9.6 13.7 21 49.8 -16 -33.8 100 0.421 5.3 -2.1 -3.2 8.9 13.3 20.9 51.6 -16 -35.6 100 0.444 5.5 -2.2 -3.3 8.8 13.2 21.5 51 -16.4 -34.6 100 0.439 1,330 1,785 2,166 2,890 3,283 3,389 3,321 Total Gini Coefficient Per Capita Current Income (Baht/Month) * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999and 2000 Household Socio-economic Survey, National Statistical office 54 Table 9: the Gini Coefficient of Household Income Distribution by Region and Community Type Region Bangkok Metropolis and 1/ Provinces in Vicinity rowSpan=10> Central North Northeast Year Total Region 1975-76 0.26 Area Municipal Areas ... 1981 1986 1988 1990 1992 1994 1996 1998 1999* 2000 1975-76 1981 1986 1988 1990 1992 1994 1996 1998 1999* 2000 1975-76 1981 1986 1988 1990 1992 1994 1996 1998 1999* 2000 1975-76 1981 1986 1988 1990 1992 1994 1996 1998 1999* 2000 0.283 0.315 0.305 0.356 0.397 0.336 0.383 0.347 0.382 0.362 ... ... ... ... 0.395 0.353 0.379 0.346 0.351 0.364 0.356 ... ... ... ... 0.401 0.391 0.387 0.386 0.388 0.404 0.39 ... ... ... ... 0.337 0.379 0.39 0.391 0.367 0.404 0.395 ... ... ... ... ... ... ... ... ... ... 0.288 0.242 0.322 0.288 0.323 0.288 0.366 0.275 0.284 0.283 0.274 0.333 0.328 0.329 0.368 0.46 0.391 0.373 0.392 0.38 0.367 0.357 0.284 0.391 0.403 0.296 0.341 0.416 0.398 0.379 0.365 0.334 0.368 Sanitary Districts ... Villages ... ... ... ... ... ... ... ... ... ... 0.304 0.31 0.375 0.326 0.381 0.35 0.376 0.342 0.355 0.381 0.292 0.299 0.327 0.362 0.338 0.377 0.4 0.369 0.369 0.432 0.367 0.392 0.363 0.307 0.4 0.383 0.406 0.38 0.437 0.414 0.379 0.38 0.448 ... ... ... ... ... ... ... ... ... ... 0.261 0.293 0.336 0.336 0.395 0.323 0.362 0.337 0.353 0.363 0.375 0.278 0.314 0.329 0.34 0.362 0.332 0.354 0.356 0.356 0.398 0.363 0.25 0.269 0.285 0.322 0.3 0.342 0.333 0.347 0.321 0.371 0.338 ... 55 Region Year Total Region Area Municipal Sanitary Areas Districts South 1975-76 ... 0.338 0.272 1981 ... 0.405 0.251 1986 ... 0.346 0.291 1988 ... 0.3 0.316 1990 0.371 0.306 0.349 1992 0.377 0.364 0.325 1994 0.402 0.336 0.351 1996 0.367 0.316 0.415 1998 0.382 0.295 0.351 1999* 0.366 0.365 0.349 2000 0.379 0.348 0.357 1/ Includes Nonthaburi, Pathum Thani and Samut Prakan. * Data collection period was from June - September 1999 Sources : The 1975-1976 1981 1986 1988 1990 1992 1994 1996 1998 1999 and 2000 Household Socio-economic Survey, National Statistical office Villages 0.297 0.276 0.314 0.32 0.362 0.341 0.396 0.343 0.381 0.331 0.352 57 Table 10 : Comparative Analysis of the Thaksin Government’s Urgent Policies (Bold prints indicate policies which are discussed in details in this paper) Name of Policy Methodology Progress 1. Grace period for farmers’ debt repayments The government grants a grace period for both interest and principle payments for 3 years for individual small farmers to relieve their debt burden as part of a comprehensive reform of the traditional farm economy to be more viable and selfsustaining in the long term. Up to the end of February 2002, a 3-year grace period for 94,328 million Baht debt repayments has been granted to 2,360,000 farmers as a part of a comprehensive reform package of the traditional farm economy. Suspension of debt repayments has been extended to other small farmers who are customers of local co-operatives. 2. The Village and Urban Revolving Fund Establish the Village and Urban Revolving Fund, funded with one million baht per each village or community as a loan facility available for individuals and households within the community to borrow for local investment and supplementary vocations. By early March 2002, 71,578 Village and Urban Revolving Funds (69,960 villages and 1,668 Urban Communities) have been set up. One million baht has been transferred into each account. This outcome amounts to 95.6% of the government’s target of 74,881 Funds. The government concurrently promotes a "One Village One Product" project to enable each community to develop and market its own local product or products based on traditional expertise and local know-how. The Government has provided the necessary technological and managerial assistances to assure that the products meet international standards and market demand. It also helps market them to both domestic and international outlets or through the internet at www.thaitambon.com The “One Village One Product” project was promoted to enable each community to develop and market its own product by making use of local know-how. The project has been successfully implemented in 75 provinces nationwide. Establish a People’s Bank to ensure better and improved access to banking facilities and resources for low income citizens to enhance their capabilities to increase their income from self employment and thus reduce their dependencies on organized and punitive money market sources. The Government has set up the People’s Bank. From June 25th , 2001 to the end of January 2002, 281,756 unemployed and persons on low income have received loans of 15,000 Baht per person or a total loan of 3,740.8 million Baht. The Bank’s objective is to enhance the people’s capacity to generate their income from self-employment and thus reduce their dependence on illegal money-lending markets. So far, only 0.6% of debtors have failed to repay their loan. The Administration has increased the 15,000 Baht loan per person to 30,000 Baht loan per person from January 2002 onward. Methodology Progress 3. The People’s Bank: a microcredit program run by the GSB Name of Policy 58 4. The Bank for Small-and Mediumsized Enterprise Establish the Bank for Small-and Medium-sized Enterprise in order to promote existing and increasing the number of entrepreneurs in a systematic manner with a view to expand the national productivity base, to increase employment opportunity and to create income, to promote exports, and to serve as the mainstay for future national economic growth and stability. 5. National AMC Policy : Thai Asset Management Corporation (TAMC) Establish a National Asset Management Corporation (which was named the ‘Thai Asset Management Corporation’ or TAMC) in order to solve the problem of Non-Performing Loans (NPLs) in the commercial banking system swiftly, systematically, comprehensively and to enable the financial system to resume their normal credit functions. 6. Privatization of state enterprises Utilize State Enterprise as key vehicle to mobilize domestic resources from Thai investors to promote revitalization and development of the Thai economy through selling shares of a holding company incorporated by grouping a number of state enterprises with strong income potentials, employing professional management, and freeing it from political interference as one alternative. Another alternative is to list individual state enterprise directly in the Stock Exchange of Thailand at the appropriate time. The Government plans to establish the Bank for Small-and Medium-sized Enterprises of Thailand. The proposed law for establishing the bank is being discussed by the parliament. It is expected to be voted on and accepted on its first reading in 2002. When passed, the bill could lead to a better functioning of the bank and actively promote Thai small- and medium-sized entrepreneurs. The National Asset Management Corporation began its operations in October 2001. Since then the TAMC has accepted multiple lots of loans (around 4,600 accounts) from state-owned financial institutions and private financial institutions, with book value totaling almost 700,000 million baht – significantly lower than their original target of 1,100,000 million baht. As of March 31st, 2002, it reported a completion of 100,216 million baht (177 cases) of debt restructuring, 55.4% of which are cases with multiple creditors. The Government has established the National State Enterprise Corporation to launch the structural reform of Thailand's state enterprises by selling shares of state enterprises to the state enterprise employees and the public. State enterprises with outstanding performance such as Internet Thailand Public Company Limited and PTT Public Company Limited are listed in the Stock Market of Thailand. There are also long-term plans to privatize the Telephone Organization of Thailand and the Communications Authority of Thailand in the future. 7. ‘30-baht’ Universal Health Insurance Scheme Provide universal health insurance with a view to reducing the overall cost to the country and the people in acquiring healthcare capping each hospital visit at 30 baht. All Thai people will be guaranteed that equal access to a nationally acceptable standard of health care. From April 1st , 2001 onward, this universal health insurance scheme has been extended to cover 75 provinces and the 38 districts of the Bangkok Metropolis. Currently, around 44 million Thais have been registered under the scheme, which also applies to private hospitals in 39 provinces 59 Name of Policy Methodology Progress 8. Drug suppression and prevention Accelerate efforts to establishing drug rehabilitation centers concurrently with implementing effective drug suppression and prevention measures. The Government has accelerated efforts aimed at drug prevention and suppression. Laws and the new social order have been stringently enforced to ensure that drug production bases, as well as national and transnational networks for drug trafficking will be severely suppressed. In cooperation with local health centers and military barracks, the Administration has set up rehabilitation centers and the "Vivatpolamuang" vocational training center for drug addicts. 9. Prevention and suppression of corruption Encourage full and open public participation in the prevention and suppression of corruption. The Government has encouraged the public to undertake a participatory role in prevention and suppression of corruption especially malfeasance by government officials. Close collaboration among different organizations such as the Office of the National Counter Corruption Commission, Non-Government Organizations and trade unions of state enterprises, especially in the area of information sharing and submission of complaint ensures effective prevention and suppression of corruption.