Economic damage control
How to nurse the Thai economy back to health, Part I
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article by Chet Chaovisidha sets an all-time record for the most number of useful vocabulary words and it's only the first instalment of a two part series!
The economic advice currently being profferred to Asian economies by the IMF, reviewed in yesterday's article, as well as the economic legacy of the Thaksin administration is addressed in great detail.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What are the prospects for the Thai economy, according to the author?
2. What are the large-scale differences between the 1997 economic crisis and the current economic problems, according to the author?
3. What three sectors did the impact of the 1997 crisis fall upon?
4. What unmentioned international institution referred to in the article pulled "the whole economy back up on its feet" after 1997? Why do you think the name of this institution isn't given? (Express your opinion)
5. What destabilising factors are undermining, or threaten to undermine, Thailand's ability to deal with its current economic problems, according to the author? How is this happening? (Read ahead a bit before answering)
6. What problems is the farm sector facing? Why?
7. How was the expansion of credit in the farm sector accomplished under the Thaksin administration and what ultimately were the results?
8. In what ways were Thaksin's policies an appropriate response to the 1997 economic crisis?
9. Is government intervention to prevent a collapse of personal finance in the farm sector a good or bad idea?
10. What factors have caused a decline of earnings in the farm sector recently, according to the author?
11. How could problems in the farm sector spill over into politics and affect future investment?
12. How did household or consumer credit expand during the Thaksin years?
13. What negative effects has this massive expansion in consumer indebtedness had on the household sector, according to the author?
14. What has the impact of the credit expansion been on the business sector?
Bangkok Post Article June 07, 2007
OPINION / THAILAND'S ECONOMIC PROBLEMS - PART I
Hardest hit will be the grassroots
By CHET CHAOVISIDHA
The state of Thailand's economy appears rather worrisome and the near-term prospects do not look promising. The following is the first of a three-part article on the major economic problems and weaknesses
On the face of it, the current situation pertaining to the economy of Thailand is not as severe as the 1997 financial meltdown and the economic collapse that followed. But the present predicament seems to be wider in scope. Why? Because in the 1997 crisis the real, financial and external sectors collapsed or were near collapse, and yet the public sector was reasonably strong and able to come to the rescue, pulling the whole economy back up on its feet, albeit with the financial assistance of a certain international financial institution. This time, all four sectors are simultaneously plagued with their own particular ills, some more serious than others, although the degree of severity in each individual sector may not be as great as those associated with the three troubled sectors in the previous 1997 crisis; yet some problems appear to be policy-resistant in nature (as will be elucidated).
Nevertheless, the situation has given rise to a great deal of concern, as it has already begun to affect the livelihood of a large portion of the Thai citizenry.
Of major significance is the political instability, manifest by incidents of rallies and protest demonstrations staged by various political and economically-affected groups, and the constant shaping of public opinion abroad against the present administration.
These destabilising activities undoubtedly contribute to the undermining of business and the general public's confidence. They give rise to the concomitant loss of investment incentives, which lead to deferrment of planned direct investment by foreign and domestic investors alike.
Adding to this, the impending general election, tentatively to be held at the end of the year, will bring with it probable changes in economic policy. The unknown factor, combined with the present government's misfiring of several policy actions, represents uncertainty and business risks which would prompt astute investors to put their long-term investment decisions on hold, at least for the time being.
Consequently, only a portion of replacement investment is being undertaken, along with the continuing investment committed earlier.
In the real sector, we are confronted with a number of difficulties. The farm sector is stricken with declining income and a corresponding fall in spending. In addition, it is saddled with a huge amount of household debt, a legacy from the consumption-driven growth policy of the previous administration which relied primarily on debt-creation, geared towards the farm sector and the lower middle class.
The platform was supported by government-owned banks and financial institutions in the form of debt-suspension, liberal lending and policy loans. It has led to the present situation, in which members of the farm sector are clamouring for higher prices for their produce, not only to cover their cost of production but also the burden of interest servicing and repayment of outstanding debts.
The previous government's free-spending and giveaway policy might have been appropriate at the beginning, during which time the economy required an exceptionally strong stimulative policy package to get it back on its feet. Unfortunately, overdoing it by continuing to pursue consumption-driven expansion in economic activities over the next several years of its tenure is the main reason for the farm sector's potential collapse of personal finance. And this will happen soon, as is generally expected, unless proper remedial policy actions are applied in time - a task which, short of a vigorous support from the public sector's financial resources, cannot be accomplished simply by relying on income generated by current market-determined prices of farm products alone. On top of this, a number of local farm products have succumbed to intense competition from foreign farm imports, to the further detriment of farm income and spending and general economic activities in the farm sector. Saddled with huge debts coupled with declining earnings and slim prospects of future improvement in the economic conditions, the local farm sector will inevitably suffer severe economic hardship.
Aside from this, an increasing number of farm communities have been brought down to earth. They are becoming disillusioned; the realisation has gradually sunk in that they are being reduced to a poverty-stricken and debt-ridden class, in the wake of the departure of the previous administration along with its populist, giveaway policies. They are becoming distraught. All these factors can be seen as a potential incubator for widespread social unrest and political discontent, as already evidenced by the mounting incidence of protests by various local agriculture-related groups - which can only add to foreign as well as local investment jitters.
The collateral damage associated with household debt has to do with salaried workers in the non-farm sectors, many of whom had previously overextended themselves financially by excessive borrowing and lavish spending.
This bad habit was made possible by the increasingly widespread use of bank and non-bank credit card facilities - the number of credit cards jumped from 1.6 million to 8.2 million between 2000 and 2005 and to over 10 million in 2007.
These individuals are compelled to languish under constant pressure to meet their monthly interest servicing and partial loan repayments on time. The offshoot is that their workplace productivity and their employers' business performance suffers.
Some household debtors have turned to refinancing their outstanding debts by resorting to new sources of funds, usually at more restrictive terms. This practice is generally deemed undesirable and unsustainable, as there are limited sources of finance available and once these have become exhausted, refinancing must come to an end and the process will reverse itself, with legal proceedings and bankruptcies following suit.
In the manufacturing sector, numerous business units, especially the small and medium-sized, have already felt the impact of the declining overall economic activity and a sizeable number have gone belly up. Many more are expected to follow suit.
Only the large-scale industrial and commercial enterprises have so far managed to endure the currently unfavourable economic conditions and withstand the onslaught of foreign competition.
TO BE CONTINUED TOMORROW.
Chet Chaovisidha is an economist, a former MP for Bangkok and an economic adviser to several past governments.
Vocabulary (in discussion above)
first instalment - the first part of a multi-part work
profferred - offered
the grassroots - the ordinary people (not leaders or other elites)
appears rather worrisome - makes you worry when you examine it
near-term prospects - the possibility of goods things happening in the near future (See glossary)
on the face of it... - when first considered...
pertaining to - related to
a meltdown - sudden and complete failure of a nuclear power plant, company, or other system
a predicament - a problem (or unpleasant situation)
the scope of a project or inquiry - the issues or work included in a project or inquiry
wider in scope - more issues included in the project or inquiry
the real sectors - business sectors and household sectors both rural and urban:
...refers to the sector in which there are productions of goods and services through combined utilization of raw materials and other production factors such as labour force, land and capital or by means of production process. Market is the determiner of what society should produce and through what combination of production factors.There are two major markets in this sector :1) production factor market, which includes raw material market, labour market, land and capital market.
(2) output market, with the business operators managing the utilization of production factors, and raw materials in order to produce goods and services as exemplified in agricultural and manufacturing productions
(From BOT glossary)
the financial sector - the banking and securities industries:
"...refers to the sector which is engaged in financial businesses by acting as an intermediary between the savers and investors and providing financial services, particularly the repayment service. This sector comprises a variety of financial institutions such as commercial banks, IBF operators, finance companies, credit foncier companies, securities companies, life insurance companies, insurance companies and stock markets." (See BOT glossary)
the external sector - businesses producing exports (See BOT glossary)
the public sector - the government
pulling back up on its feet - helping recover from a problem
x albeit y - y reduces the force or significance of y
x plagued with y, x plagued by y - y causes x to suffer
degree of severity - how bad it is
elucidated - made clearer and easier to understand
the livelihood of x - the job or source of income that allows x to buy the things they need (for example, the livelihood of a farmer is the crops that eh sells)
political instability - political events and developments are unpredictable
rallies - large public meeting to show support for a political party
concomitant - happening at the same time as
deferrment - delaying to a later time
impending - about to happen soon
tentatively - not final, will change
astute - has an understanding of situations and peoples' behaviour in those situations
put on hold - stop temporarily
for the time being - temporarily for now (until there is a new opportunity in the future
replacement investment - replacing machines and facilities that are old adn no longer productive
stricken with x - severely affected by x which is bad and unpleasant (from the word "strike")
x saddled with y - x put in a position where they have to deal with problem y
a legacy from x - something left over or remaining from the past, as a result of x
consumption-driven growth policy - a policy of the Thaksin administration, an (autonomous/exogenous) increase in consumption from increased consumer debt, for instance, leads to Keynesian multiplier effect increasing consumption even more (See Wikipedia on multiplier and Keynesian multiplier)
debt-suspension - delaying the paying back of money that is owed
clamouring for - demanding in a noisy and angry way
interest servicing - paying back the interest part of the loan (not including the principal, the mount of money origianlly loaned)
outstanding debts - the amount of money that remains to be paid back
stimulative policy package - government policy to increase economic activity and growth (either an increase in government spending or increase in the money supply and/or credit and loanable funds)
remedial - correcting an action that has been done wrong
remedial policy actions - policy to correct the incorrect policies of the past
succumbed to x - do x, even though you shouldn't
to the detriment of x - harms or damages x
* to the further detriment of
coupled with - combined with
slim prospects of - not likely that (See glossary)
brought down to earth - become a lot less excited about something
becoming disillusioned about x - coming to believe that x is not as good as you thought
realisation has gradually sunk in that - it took a long time to understand, but now they understand
poverty-stricken - is very poor
debt-ridden - has a very large amount of debt
distraught - upset and worried (so they cannot even think clearly)
incubator for x - an environment that helps x survive (an incubators is special equipment in hospitals that helps small or weak babies survive)
local investment jitters - investors are worried and anxious
collateral damage - accidental damage that was not intended (during a military operation)
overextended themselves financially - take on too much debt, borrow too much money, so that it is difficult to pay back
lavish spending - spending lots of money in a very impressive and showy way
compelled to - forced to
languish under x - suffer in an unpleasant situation x (which they cannot leave)
given y, the offshoot is x - x developed from y, x is the result of y
more restrictive terms - loan contract is changed forcing borrower to pay back quicker or without leneincy
bankruptcies - (See Wikipedia on bankruptcy)
the onslaught of x - huge amount of x, so difficult to deal with x
Answer Key:
1. What are the prospects for the Thai economy, according to the author?
In the short-term the economic situation does not seem to be very promising.
("The state of Thailand's economy appears rather worrisome and the near-term prospects do not look promising. The following is the first of a three-part article on the major economic problems and weaknesses")
2. What are the large-scale differences between the 1997 economic crisis and the current economic problems, according to the author?
a. The current situation is not as severe as the 1997 crisis situation
b. The current situation is wider in scope because the government (public sector) is not in as strong position.
3. What three sectors did the impact of the 1997 crisis fall upon?
The real, financial and external sectors.
4. What unmentioned international institution referred to in the article pulled "the whole economy back up on its feet" after 1997? Why do you think the name of this institution isn't given? (Express your opinion)
The unmentioned institution is, of course, the IMF whose approach to dealing with the 1997 crisis was highly controversial and targeted by Nobel Laureate Joseph Stiglitz in his book Globalization and its Discontents.
5. What destabilising factors are undermining, or threaten to undermine, Thailand's ability to deal with its current economic problems, according to the author? How is this happening? (Read ahead a bit before answering)
a. Rallies and protest demonstrations staged by political and economically-affected groups.
b. The constant shaping of opinion abroad against the the present administration.
c. The general election at end of year may bring about yet another policy shift.
d. The current government's policy mistakes ("misfirings")
As a result, they have:
a. Undermined business and public confidence.
b. Caused foreign and domestic investors to defer planned investment.
6. What problems is the farm sector facing? Why?
a. Declining income
b. Declining consumption spending
c. Saddled with debt, so....
d. No more consumption spending
The debt burden part above originates in the "consumption-driven growth policy" of the Thaksin administration which stimulated short-term consumption by the farm sector and middle-class through the creation of debt.
7. How was the expansion of credit in the farm sector accomplished under the Thaksin administration and what ultimately were the results?
The expansion of credit in the farm sector was accomplished by:
a. Government-owned banks and financial institutions
b. Debt-suspension.
c. Liberal lending
d. Policy loans
The result has been an untenable situation in the farm sector with pressures to pay back heavy rural debt met with demands for higher prices for agricultural products, but unfortunately these prices are determined by market forces.
("The platform was supported by government-owned banks and financial institutions in the form of debt-suspension, liberal lending and policy loans. It has led to the present situation, in which members of the farm sector are clamouring for higher prices for their produce, not only to cover their cost of production but also the burden of interest servicing and repayment of outstanding debts.")
8. In what ways were Thaksin's policies an appropriate response to the 1997 economic crisis?
At the beginning of the 1997 economic crisis using consumption and government spending to drive economic expansion stimulated economic recovery.
However, continuing to pursue this policy after recovery had been achieved is the "main reason for the farm sector's potential collapse of personal finance."
9. Is government intervention to prevent a collapse of personal finance in the farm sector a good or bad idea?
A good idea and absolutely necessary, according to the author:
"...continuing to pursue consumption-driven expansion in economic activities over the next several years of its tenure is the main reason for the farm sector's potential collapse of personal finance. And this will happen soon, as is generally expected, unless proper remedial policy actions are applied in time - a task which, short of a vigorous support from the public sector's financial resources, cannot be accomplished simply by relying on income generated by current market-determined prices of farm products alone.")
10. What factors have caused a decline of earnings in the farm sector recently, according to the author?
Intense competition from foreign farm imports has a negative effect on farm income.
11. How could problems in the farm sector spill over into politics and affect future investment?
If farmers come to feel that there is no way out, then this will generate "social unrest" and "political discontent" and there will more and more protests by agriculture-related groups, political instability will result and local and foreign investment will be even further deferred.
12. How did household or consumer credit expand during the Thaksin years?
Credit card usage expanded from 1.6 million to over 10 million in 2007.
13. What negative effects has this massive expansion in consumer indebtedness had on the household sector, according to the author?
Workers with fixed salaries over-extended themselves with loans to finance lavish spending. With pressure to make payments on loans they really could not afford, their work performance suffered, some have been forced to refinance these loans to make their payments, and sometimes they have even faced legal proceedings and bankruptcy.
[Note: This dramatic story would benefit from statistical data to support it. Statistical evidence would make all of these implications easier to accept. This is, of course, beyond the scope of a newspaper editorial.]
14. What has the impact of the credit expansion been on the business sector?
Large-scale commercial and industrial enterprises have all been able to weather the bad economy, but many Small and Medium-sized Enterprises (SMEs) have become insolvent and gone out of business.
