Straight talk on investment and growth from former Senator and banker Burapa Atthakor
By Jon Fernquest
The
opinions and facts presented in today's article are not often
heard and would be considered controversial and even iconoclastic by many. Did you know that:
1. More than 50% of Thailand's workforce work in agriculture, but agriculture only contributes 10% to national income (GDP).
2. Even though it is a major world food exporter, Thailand's agricultural productivity is less than 1/10th that of countries such as New Zealand, Australia and the United States.
3. Twenty years ago the share of agriculture in government spending was 20%. Now it is a mere 10%. Low priority given to agriculture means that Thailand's irrigation systems are inadequate. (The second stage of Thailand's combination fiscal stimulus-investment programme is targeting irrigation for improvement).
4. There are 70 state enterprises operating in Thailand's public sector with a total expenditure of around 20% of Thailand's GDP. These state enterprises continually "seek special protection and privileges" not available to others. Many of the permanent career bureaucrats working in the public sector "mistakenly equate the benefits to state enterprises with national interests."
Many of the recommendations on how to deal with these problems are equally as controversial:
1. Allow more competition by private companies with state enterprises to force them out of business, that is if they can't become more efficient.
2. Replace the blanket coverage of the Foreign Business Act (FBA) for all industries in Thailand with selective coverage for certain strategic industries.
3. Increase specialisation at the university level and leave testing to neutral outside examiners.
4. Increase investment in agriculture.
Today's article follows the vocabulary:
controversial -
people disagree about it and would debate and argue about it
iconoclastic - criticizing beliefs that are commonly accepted by society
workforce - the people working in a whole economy or one company
low priority given to Y - Y is considered less important than other things
inadequate - not good enough to solve the problem or deal with the situation
combination fiscal stimulus - investment programme - a programme that both puts money into the economy at a critical time when consumer spending has fallen (fiscal stimulus) and also invests for the future building much needed infrastructure
state enterprises - companies owned by the government
national interests - for the benefit of the country, not the individual
privileges, special privileges - special things that you can do that others cannot do
bureaucrats - people working in government
blanket coverage - covers everything
Foreign Business Act (FBA) - Thailand's laws on foreign investment in the Thai economy
selective coverage - covers only some things, a small selection
specialisation - having limited but detailed knowledge in a certain area, doing a small number of tasks or a special job very well
neutral - not on either side of a disagreement, in the middle
neutral outside examiners - people from outside the organisation looking around for problems (not involved with or siding with anyone in the organisation)
iconoclastic - criticizing beliefs that are commonly accepted by society
workforce - the people working in a whole economy or one company
low priority given to Y - Y is considered less important than other things
inadequate - not good enough to solve the problem or deal with the situation
combination fiscal stimulus - investment programme - a programme that both puts money into the economy at a critical time when consumer spending has fallen (fiscal stimulus) and also invests for the future building much needed infrastructure
state enterprises - companies owned by the government
national interests - for the benefit of the country, not the individual
privileges, special privileges - special things that you can do that others cannot do
bureaucrats - people working in government
blanket coverage - covers everything
Foreign Business Act (FBA) - Thailand's laws on foreign investment in the Thai economy
selective coverage - covers only some things, a small selection
specialisation - having limited but detailed knowledge in a certain area, doing a small number of tasks or a special job very well
neutral - not on either side of a disagreement, in the middle
neutral outside examiners - people from outside the organisation looking around for problems (not involved with or siding with anyone in the organisation)
Opinion
PERSONAL VIEWPOINT
The Thai economy in the current crisis
BURAPA ATTHAKOR5/08/2009
The key to solving an economic crisis is the same as the key to economic prosperity. It can be summarised in one word: Productivity.
In a competitive world, if we can produce better goods at a lower cost than our competitors, we win even if the world is in a recession, particularly if we are an agricultural economy because when people become poorer, they can do without most things, but not without food.
In the current global recession, most countries including Thailand have taken measures to stimulate the economy. Money is being spent on thousands of projects which will doubtlessly generate income and employment. But of course, you can generate income and employment just by having people digging holes and filling them repeatedly. This, however, is not the most efficient way to stimulate the economy. Japan's lost decade, despite several doses of stimulus, has demonstrated the drawback of lack of attention to efficiency and productivity.
In a recent seminar on the "Current Global Financial Crisis," Professor Yoshino Naoyuki of Keio University mentioned the Japanese construction of several bridges linking small islands which few people use, to illustrate examples of inefficient government spending to stimulate the economy.
Just injecting money into the economy will not be very effective as a long-term solution to a recession, particularly if the economy remains inefficient and uncompetitive.
My proposal to curing the economic recession in Thailand is, first, to identify the weaknesses and the inefficiencies in the Thai economy, and then to concentrate resources on solving the problems. Some of the solutions may not require financial input from the government, but only the adoption of appropriate policies.
Identifying inefficiencies in the Thai economy is not a difficult task.
Low agricultural productivity
One of the most striking things about the Thai economy is its low agricultural productivity. Even though Thailand is one of the major food exporters of the world our agricultural productivity is less than 1/10th that of the most productive countries such as New Zealand, Australia and the United States. And do you know that even though more than 50% of the Thai workforce of about 35 million work in the agricultural sector, this sector contributes only 10% to Thai GDP?Thailand is blessed with naturally fertile land, but successive governments have been blindly following policies which have severely negated our natural advantages.
The major mistake has been, and still is, the policy of promoting land ownership by small individual farmers which has had the effect of preventing large-scale farming which can benefit from economy of scale. We still have millions of individual farmers owning or renting just a few acres of land. It makes no sense to me that while we do not encourage every worker to have his or her own factory, we are encouraging individual farmers to have their own land, the price for which is low productivity.
Another major obstacle to increasing agricultural productivity in Thailand is the low allocation of resources to agricultural development. Despite the lip service paid by every government to the importance of agriculture in the Thai economy and society, the budget allocation to the sector has continued to decline - from 20% of the national budget 20 years ago, to less than 10% now. Successive governments have continued in reality to accord low priority to agricultural development. Action speaks louder that words.
As a result of the low priority given to agriculture, irrigation in Thailand is still totally inadequate, the application of technologies far behind the West. Even the simple use of fertiliser is not that common because many farmers cannot afford it and do not have the capacity to borrow. It is also for some an unacceptable risk, because there will be no returns but only costs from using fertiliser if crops are destroyed by drought or flood.
Despite all these disadvantages, Thailand is still a major food exporter. Imagine what can the achieved with better management and policies. While increasing actual output many times over, costs can simultaneously be reduced to make Thai agricultural products more competitive. Even with the protectionist agricultural policies of some countries, the rest of the world is a big enough market for our agricultural products as long as we can produce them more efficiently than our competitors.
Educational standards
Another major inefficiency in the Thai economy is the low standard of education. Up to 25% of the national budget is devoted to education each year, but over the years the standard has not improved much. There are no doubt many reasons for the problem which must be identified and put right. Reforming the educational system is of course not something that can be done overnight, but will take time. But we should start now.Among the shortcomings that the Thai educational system suffers from are the following:
1.
Students are encouraged to memorise rather than analyse.
2. Government policy in the past has favoured investment in bricks and mortar rather than in books and software.
3. Insufficient specialisation in higher education.
4. The method of testing which leaves all the testing to the teachers of the students themselves with no requirement for participation of neutral outside examiners.
2. Government policy in the past has favoured investment in bricks and mortar rather than in books and software.
3. Insufficient specialisation in higher education.
4. The method of testing which leaves all the testing to the teachers of the students themselves with no requirement for participation of neutral outside examiners.
Investment in productivity
In the shorter term, another measure that can be taken to promote productivity in the Thai economy is to review the investment promotion policy. Currently Thailand has a Board of Investment (BoI) which offers tax privileges to selected new businesses. The issue is that while some new businesses get promotional privileges, existing ones do not and operate at a competitive disadvantage. If we turn our attention to focus on increasing productivity, what we should do is to offer incentives to existing firms to invest to increase productivity. Any project to improve productivity should be encouraged and promoted.Apart from what can be done in agriculture, the whole Thai economy will also be able to increase its growth rate substantially by being genuinely and properly liberalised.
At the stage of economic development that Thailand is in, competition can provide a driving force for it to take off. Thailand still has many laws and regulations restricting foreign businesses from operating in Thailand thus limiting competition. The main negative law is the Foreign Business Act which was designed to protect Thai businesses even if they are inefficient.
My frequent attempts to convince policy-makers that such a law hinders growth and penalises consumers, who are all of the Thai people, have so far not been successful.
To promote maximum economic growth, this law will have to be repealed. If there are specific businesses that should be protected for whatever reasons, specific laws should be considered. The current Foreign Business Act protects all the Thai businesses except those specifically exempted.
Inefficiency of public sector
The last glaring major obstacle to economic growth in the Thai economy is the inefficiency of the public sector in operating 70 state enterprises with total expenditure of much as 20% of Thailand's GDP.Unfortunately the tendency of state enterprises has generally been to seek protection and special privileges which is hardly conducive to growth. Many bureaucrats mistakenly equate the benefits to state enterprises with national interests.
The solution, however, is not necessarily to sell all the state enterprises, but to allow more competition which will either force them to raise efficiency or go out of business.
Burapa Atthakor is a former Senator and banking executive.
Relate Search: Yoshino Naoyuki, Keio University, rice
(Source: The Thai economy in the current crisis, BURAPA ATTHAKOR, 5/08/2009, link)
Vocabulary:
straight talk - saying what you really think, rather than just being polite
personal viewpoint - what you personally feel about an issue
economic prosperity, prosperity - being successful in business, making lots of money
productivity - the quantity of goods produced or the speed that they are produced at with a given investment of labour and capital
agricultural productivity - how much crops can be produced from given land, labour, and equipment
efficiency - to achieve goals and succeed without wasting time and energy (to use as little time and energy as possible in achieving goals)
inefficient - not efficient
stimulate the economy - do things to get economic activity started again and to make the economy grow
Japan's lost decade - the 1990s in Japan with a sluggish economy (difficult to turn around)
a dose of Y - one amount of medicine given to a patient to cure their disease
doses of stimulus - amounts of government spending injected into the economy to get it running again
a drawback of Y - one of the bad things about Y (to considered along with the good things)
lack of attention to Y - people are not concerned about and spending time dealing with problem Y (and they should be)
injecting money into the economy - either government spending and tax cuts or buying up government bonds with money (open market operations, monetary policy)
adoption of Y - starting to use Y
appropriate policies - policies that fit or are suitable for the situation
striking things - surprising things interesting to read
workforce - the people working in an economy or for one company
fertile land - land good for producing lots of crops
blessed with Y - have good thing Y because you are lucky (not by your own effort)
blessed with naturally fertile land - Thailand has lots of good land for growing crops
economy of scale - when cost of goods decreases as more and more of the goods are produced
makes no sense - not logical, difficult to understand how it happened
major obstacle to X - one of the main things that prevents X from happening
lip service paid to Y, pay lip service to Y - say you support Y but actually do nothing to support
budget allocation to the sector - the part of the annual government budget given the to (agricultural) sector
low priority given to Y - they do not think that Y is important
simultaneously - at the same time as
protectionist - creating laws to prevents the exports of other countries from entering the country
reforming - making improvements to
not something that can be done overnight - not something that can be done quickly
shortcomings - faults and weaknesses that a person or thing has investment in bricks and mortar -
insufficient - not enough
specialisation - a narrow range of work using special skills
insufficient specialisation - not enough knowledge about how to do specific kinds of useful tasks and work
neutral - not on either side of a disagreement, in the middle
neutral outside examiners - people from outside the organisation looking around for problems (not involved with or siding with anyone in the organisation)
Board of Investment (BoI) - the Thai government organisation that tries to attract investment by offering incentives
incentives - rewards to encourage certain actions or behaviours
genuinely Y - is truly Y, doesn't just look like Y
liberalised - to make the rules for an industry less strict, so it is easier to do business and for new companies to enter the industry
Foreign Business Act (FBA) - Thailand's laws regarding foreign investment in its economy
hinders growth - makes growth more difficult
penalises consumers - makes consumers pay more than they should have to pay
law will have to be repealed - laws that will have to be officially ended
specific laws -
a glaring Y - something very big and easy to notice (for example: a big glaring mistake in the report, glare = stare or look at intensely)
a glaring major obstacle - something that prevents achieving a goal, that is very easy to see
public sector - the government
state enterprises - companies owned by the government
expenditure - money spent
privileges, special privileges - special things that you can do that others cannot do
X conducive to Y - X makes it easier for Y to happen
hardly conducive to growth - doesn't help increase growth at all (means should be obvious)
bureaucrats - people working in government
mistakenly do Y - do Y but then discover not the right thing to do
equate X with Y - believe that or treat X as the same as Y
in the national interest - benefiting the country as a whole (not just one group inside the country)
go out of business - business fails, no longer exists
