Economic damage control
How to nurse the Thai economy back to health, Part II
(11-06-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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With the referendum on Thailand's draft constitution drawing near, what's happening in the Thai economy has become an urgent question.
Voters will want to make an informed decision when they cast their vote. The current state of the Thai economy is surveyed in this second instalment of a three part series [Part I]. Issues covered include:
* The impact of foreign retailers on local family-owned retail in Thailand.For further reading, read about Thailand after the 1997 crisis in the academic paper co-authored by the current Finance Minister Chalongphob Sussangkarn Ten Years After the Financial Crisis in Thailand: What Has Been Learned or Not Learned?, freely downloadable from a special review of the 1997 crisis ten years later in the Asian Economic Policy Review (June 2007).* The current burden of debt on Thai society.
* Long-term growth and what is necessary to achieve it.
* The current weak fiscal position of the Thai government.
* The benefits and drawbacks of a stronger baht.
Read a previous article Bangkok Post editorial that argued for positive benefits from foreign retailing presence in Thailand. Read archived Bangkok Post articles and lessons on Retail and Consumer Credit.
Read a Chang Noi article "A prophet on Thailand’s political future" (19-02-07) that discusses Thai political scientist Anek Laothamatas:
"In his book, Thaksina-prachaniyom (Thaksin-style populism) Anek worries that Thaksin could be a signal of even worse to come. Thaksin gave people things they wanted, and was rewarded with massive support at the polls. Even if Thaksin and TRT vanish from Thailand’s political map, this populism will stay. Other leaders will copy it. Once one party offers people the moon, then its rivals must offer the moon and the stars. But Anek fears the risks are massive. The people become dependent on state handouts. The bureaucracy is politicized. The economy dives into the same kind of economic crises as populist Latin America. Society is sharply divided between the lower-class who benefit from populism, and the middle and upper classes who have to pay for it."The need for voters to become better informed before the referendum is stressed in the post "Will rural voters be 'confused to death'?" at New Mandala Blog from Australian National University (ANU).
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What factors give large-scale commercial foreign hypermarts (Lotus, Carrefour, Big-C) an advantage over the smaller family-owned Thai retail businesses?
2. What has been the short-term impact of foreign retailers been on Thai retail businesses?
3. What long-term benefit might the presence of foreign retailers in Thailand result in, according to the author?
4. Has the presence of foreign retailers changed Thai retailing? Are some products or ways of doing business in Thailand now available that were previously not available? (Express your opinion)
5. How has debt come to pose more of a threat to society recently?
6. What does long-term growth in any economy, generally rely upon?
7. What is necessary to produce long-term sustainable growth, according to the author?
8. What percentage of Thailand's economy is in the external sector?
9. Does Thailand gain a competitive advantage over other countries in international markets from cheaper labour?
10. What changes has Thailand's financial sector undergone since the 1997 crisis?
What limitiations has this resulted in?
11. Is the government's current fiscal position weak or strong? Why?
12. How has the strong baht helped to reduce inflation?
13. What negative effects has the strong baht had on the economy?
14. How has the yen historically helped to alleviate baht appreciation against the dollar? What's happening this time around?
Bangkok Post Article June 08, 2007
OPINION / THAILAND'S ECONOMIC PROBLEMS - PART IIThe trouble with the strong baht phenomenon
This second of a three-part article on the Thai economy deals with the troubles in the financial system and the effects of a strong baht By CHET CHAOVISIDHAContinuing from the first instalment on the state of the Thai economy published yesterday, we carry on with our investigation of the causes for the current state of economic malaise: The large-scale industrial and commercial enterprises are primarily supported by their superior technical know-how, strong financial position and more efficient management and operations, in a spirit congruous with the modern, knowledge-based business world. The local retailing sector has virtually been clobbered by the foreign retailing chainstore giants, as witnessed by the disappearance of countless traditional local mom-and-pop stores all over the country.
While long-term merits and defects of this continuing displacement of the local small shops by the foreign retailing chainstore giants are still being debated, and further evidence is required to substantiate the claim that this situation will eventually lead to a long-term increase in efficiency in the retailing sector as a whole, with net positive benefits ultimately accruing to the economy - the short-term prospect is quite clear, as evidenced by the loss of business, jobs and livelihood of a substantial proportion of the local retailing community previously engaged in this sector.
The tourism industry is also suffering a setback, as growth in this sector has not met earlier expectations, partly as a consequence of insurgency in the South, arson activities against schools in the Northeast and the threat of sporadic bombings in the central region and the capital.
Besides, this sector has also been most acutely plagued by the"'expansion without employment" phenomenon, which ascribes expansion in output and income to increased productivity attributed to an advancement in technology and the utilisation of modern, labour-saving machinery and telecommunications equipment, especially in the high-technology service activities.
Hence the past several years have witnessed the expansion in service activities with correspondingly little or much less than a proportionate increase in employment in this sector - a troublesome tendency, considering that this sector has traditionally been the most progressive and dynamic in its employment-creation capacity and ability to absorb new entrants into the labour force.
On top of all this, the real sector is also inflicted with the so-called "household debt" problem. Over the past several years, induced by the previous government's populist policies, household debts have increased tremendously.
On average, they exceed household income earnings by a staggering margin. Since most of these indebted households belong to the lower- and middle-income class and the grassroots echelon of society - and their income-earning potential is well below the level required to meet their debt obligations - the situation presents a serious problem for policy-makers.
Why? Because by its nature, this kind of problem becomes increasingly more difficult to deal with under recessionary conditions, as the current economic downturn tends to further aggravate the debtors' situation by putting their job security, income and livelihood at risk.
As an increasing number of households falls into this category, and as their debt burden accumulates with no prospect of improvement of income in sight, they will be likely to start calling upon the authorities to come up with the necessary funds to bail them out.
Unfortunately, such a policy action is unlikely to materialise, on account of the government's precarious fiscal and financial position.
Finally, there is also a genuine concern relating to the long-term growth of the Thai economy.
The growth in GDP is largely attributable to the quantity and quality of labour input and investment or capital accumulation. In the case of Thailand, the investment in new plants and more productive machinery and equipment is the chief contributor to our GDP growth. As reported by a government agency, contribution by a rise in productivity remains rather limited. In this respect, an additional important statistic can give a broader and more relevant perspective: the average rate of economic growth of the past years since 1997 has been consistently below that of the similar interval leading up to the 1997 crisis.
This suggests that the Thai private sector has become more conservative and cautious about over-investing in the same reckless fashion as it did during the years prior to the 1997 crisis.
In this day and age, various countries strive for a high rate of growth and lower cost of production through an increase in productivity. Raise their competitive edge, to be precise. They recognise that the innovation and investment to raise productivity and competitiveness are today's only answer to tomorrow's sustainable growth.
Thailand is an open economy with exports making up roughly 60% of the GDP.
As our competitive edge used to lie in cheap labour, a factor which no longer holds true today, the country's relatively low rate of investment plus slow rise in productivity under the existing, competitive global conditions almost translates to dying a slow economic death. Other emerging countries will soon sweep past Thailand in the economic race to world markets.
The financial sector has, over the past several years, assumed a new complexion in its structure, organisation, and operation.
Since the 1997 financial crisis and the tragedy that followed, a number of local commercial banks and major non-bank financial institutions have fallen into foreign ownership. These foreign majority-owned financial institutions tend to follow modern banking principles and, more often than not, lend on the basis of project feasibility, management ability and good corporate governance, as opposed to traditional banking practices which tend to extend loans to borrowers on the basis of personal relationship and collateral-asset availability.
As a result, the existing financial system is characterised by a situation in which most large-scale enterprises with superior technical know-how, efficient and prudent financial management and operations, a strong financial position and accurate perception of the current and future economic and business outlook, generally find themselves needing less credit from financial institutions. This is despite the latter's willingness to lend to them as they are attracted by their appearance of efficiency and superior performance.
On the contrary, medium- and small-sized business find themselves less able to obtain additional credit for their cash-strapped operations. Potential lenders, with the exception of government-owned financial institutions, look unfavourably on their traditional-style management and operation and are unwilling to extend additional credit, be it asset-based or otherwise.
Another aspect of the financial system is that although technically these foreign majority-owned financial institutions are subject to the same regulation and supervision of the central bank, in practice, they are obligated to attain the objectives and follow the policy guidelines of their overseas parent banks.
Hence the existence of several foreign majority-owned financial institutions signifies a tacit understanding that the existing financial system has become less amenable to the central bank's control. As a result, monetary policy actions have been rendered less effective than previously.
The public sector is currently plagued with a wobbling fiscal position, an inevitable outcome of a weakening economy and declining tax revenues. Additionally, most of the state-owned banks and so-called semi-financial institutions have been seriously weakened by the financial burden imposed upon them by the previous government's free spending and giveaway campaigns.
The upshot is that fiscal policy is subject to a rigid constraint, as a severe limitation has been imposed upon them by the relative scarcity of fiscal and financial resources available.
Inflation has not been a serious threat over the past years, in spite of soaring energy prices and rises in transport and distribution costs. The situation could have been worse had it not been for the working of the strong exchange rate of the baht, which operates to prevent domestic energy prices from going up as high as they could, and would, have. Against the generally unpromising economic backdrop, this could almost be regarded as a bright spot.
Lately though, inflation has begun to rear its ugly head once again. The external sector is at present undergoing a painful experience of the strong-baht phenomenon.
The trouble with the strong baht is that it tends to make for a decline in our exports of goods and services and a rise in imports. This has the effect of depressing our domestic income, production, output and employment.
The reduction, in turn, leads to a fall in consumption and investment expenditure as a result of lower household income and business profitability, thus setting off further rounds of decline in income, production, output, employment, and consumption and investment, until the process finally comes to an end through the income-expenditure interacting mechanism.
This situation has been the outcome of many complex circumstances and an interplay of a host of variables. In the first place, we are being squeezed by a weak dollar as well as a weak yen. Historically, the dollar and the yen moved in opposite directions. As a result, the adverse effect of the former on the performance of our external sector, in terms of exports and imports, was usually and, to a large extent, negated by the latter, and vice versa.
Strangely, the current situation is one in which dollar is weak against the baht and the yen is weak against the dollar and also against the baht. So, conceptually, our exports are supposed to be discouraged while imports encouraged.
Fortunately, Japan's economy has been recovering from its lengthy doldrums. Its increasingly more robust economy has prevented the growth of our exports from decelerating as much as they would have.
Chet Chaovisidha is an economist, a former MP for Bangkok and an economic adviser to several past governments.
The final instalment of this article will be published tomorrow.
Vocabulary (in discussion above)
urgent - needs to be done quickly, as quickly as possible (ASAP)
an informed decision - knowing what is happening before making decision (getting information and reading analysis by experts)
cast a vote - voting in an election
referendum - when the people of a country are asked to vote on a policy to show whether they agree with it or not
a phenomenon - (formal, scientific) something observed to happen
first instalment - first part of a multiple part series
malaise - being disatisfied and unhappy
economic malaise - being disatisfied and unhappy about the economic situation
congruous with - fits together well with
in a spirit congruous with - in a spirit that fits well with
clobber - hit
clobbered by - hit and damaged by
countless - a very large amount
the displacement of x by y - (formal) removal of x and replacement by y
substantiate x - provide evidence to prove that x is true
* further evidence is required to substantiate the claim thatbr>
a setback, suffering a setback - some bad event happened that put the project further away from its goal
accrue - gradually increasing amount over time
ultimately - in the end (after a long and complex series of events)
benefits ultimately accruing to -
arson - the crime of setting fire to a building (not an accident)
sporadic - happening at irregular intervals
sporadic bombings - continual but unpredictable bombings
acutely - felt strongly
plagued by - suffer from a problem
most acutely plagued by - suffer most strongly from
have witnessed the - have seen the, have experienced the
capacity for x - ability to do x
employment-creation capacity - ability to create jobs
induced by - caused by
a margin - difference
staggering - very surprising
exceed by a staggering margin - was surprisingly greater than
echelon of society - level of society
tends to further aggravate the debtors' situation by -
job security - protection against losing your job (some jobs and companies provide better job security with it being more difficult to lose your job when business is bad, for instance, or performance suffers for some reason)
bail out - providing money when someone has a money problem
materialise - happen, appear
such a policy action is unlikely to materialise - such a policy action is unlikely to happen
precarious - uncertain outcome, may fail
genuine - real, true, not false
a genuine concern - is really a concern
attributable to y - caused by y, explained by y
x is largely attributable to y - x was mostly caused by y
rise in productivity, rise in labour productivity - rise in the amount produced for every amount of input, such as an additional hour worked (See The Economist on productivity)
reckless, in a reckless fashion - not caring about danger or harming other people in one's actions
complexion - the general character and quality of something
assumed a new complexion - changed its general character
feasibility - (formal) the possibility that a project could be successful (usually the subject of a formal evaluation)
lend on the bases of project feasibility - only lend money if the project can
corporate governance - how corporations are run, "the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large." (From Wikipedia)
collateral - assets used as a guarantee for loan repayment (if the loan is not repaid the lender takes the collateral)
* collateral-asset availability
cash-strapped - in need of cash, cash is scarce
cash-strapped operations - when the operations of a business are in severe need of cash to continue effective operation
signifies... - indicates that there is..., shows that there is...
tacit - without saying so, without admitting
a tacit understanding - unspoken agreement
signifies a tacit understanding that - shows that there is an unspoken agreement
amenable to - willing to do or accept
less amenable to the central bank's control -
x plagued with y - x has to endure and deal with a bad thing y
wobbling - not steady or constant (movign from side to side in an erratic way as it moves forward)
the fiscal position - how much of a surplus or deficit there is in government expenditure, (how unbalanced the government budget is)
plagued with a wobbling fiscal position -
inevitable - certain to happen, cannot be avoided
inevitable outcome - something certain to happen
The upshot is that... - the final surprising result is that...
rear its ugly head - something bad happens
* begun to rear its ugly head once again
doldrums, in the doldrums - very little activity, nothing new happening
Answer Key:
1. What factors give large-scale commercial foreign hypermarts (Lotus, Carrefour, Big-C) an advantage over the smaller family-owned Thai retail businesses?
a. Superior technical know-how.
b. A strong financial position (easier to weather a downturn, delays, or regulatory glitches, can afford to wait).
c. More efficient management and operations.
2. What has been the short-term impact of foreign retailers been on Thai retail businesses?
Traditional local mom-and-pop retail businesses have disappeared (been clobbered, wiped out). There has been a "loss of business, jobs and livelihood of a substantial proportion of the local retailing community previously engaged in this sector."
3. What long-term benefit might the presence of foreign retailers in Thailand result in, according to the author?
The presence of foreign retailers might lead to an increase in efficiency in the retailing sector as a whole.
4. Has the presence of foreign retailers changed Thai retailing? Are some products or ways of doing business in Thailand now available that were previously not available? (Express your opinion)
5. How has debt come to pose more of a threat to society recently?
a. Debt has increased dramatically among the middle- and low-income parts of society
b. This increase in debt has not been accompanied by any corresponding increase in income-earning potential.
c. This debt becomes an increasing burden in a sluggish economy like the current one.
d. Calls for government bailouts are a likely result, but not possible due to the government's weak fiscal and financial position.
("On top of all this, the real sector is also inflicted with the so-called "household debt" problem. Over the past several years, induced by the previous government's populist policies, household debts have increased tremendously. On average, they exceed household income earnings by a staggering margin. Since most of these indebted households belong to the lower- and middle-income class and the grassroots echelon of society - and their income-earning potential is well below the level required to meet their debt obligations - the situation presents a serious problem for policy-makers. Why? Because by its nature, this kind of problem becomes increasingly more difficult to deal with under recessionary conditions, as the current economic downturn tends to further aggravate the debtors' situation by putting their job security, income and livelihood at risk. As an increasing number of households falls into this category, and as their debt burden accumulates with no prospect of improvement of income in sight, they will be likely to start calling upon the authorities to come up with the necessary funds to bail them out. Unfortunately, such a policy action is unlikely to materialise, on account of the government's precarious fiscal and financial position.")
6. What does long-term growth in any economy, generally rely upon?
a. The quantity of labour input
b. The quality of labour input
c. The quantity of investment and capital accumulation.
d. The quality of investment and capital accumulation.
("The growth in GDP is largely attributable to the quantity and quality of labour input and investment or capital accumulation.")
7. What is necessary to produce long-term sustainable growth, according to the author?
Investment and innovation is necessary to raise productivity and international competitiveness.
("In this day and age, various countries strive for a high rate of growth and lower cost of production through an increase in productivity. Raise their competitive edge, to be precise. They recognise that the innovation and investment to raise productivity and competitiveness are today's only answer to tomorrow's sustainable growth.")
8. What percentage of Thailand's economy is in the external sector?
60%. In terms of GDP (not population) 60% of Thailand's annual output are exports generated by the "external" sector.
("Thailand is an open economy with exports making up roughly 60% of the GDP.")
9. Does Thailand gain a competitive advantage over other countries in international markets from cheaper labour?
No, they have in the past, but other countries have cheaper labour nowadays.
10. What changes has Thailand's financial sector undergone since the 1997 crisis?
What limitiations has this resulted in?
Foreign overship has led to "modern banking practices" and lending on the basis of "project feasibility".
This has led to an abundance of credit for large-scale enterprises with modern management practices which don't really need this extra credit and a reduction in credit for "cash-strapped" SMEs with traditional style management
practices that do need the credit.
The question of whether this is actually bad or not is not addressed though. If lending to SMEs leads to a higher level of non-performing perhaps existing practice is justified or perhaps improvements in loan screening processes are necessary.
11. Is the government's current fiscal position weak or strong? Why?
Weak. The fiscal position is weak because of lower tax revenues from reduced economic activity due to political uncertainty. State-owned banks have been weakened by huge increases in credit during the Thaksin years. A weak economy with high levels of debt has great potential for default and non-performing loans.
[Note: Statistical support would make the argument stronger.]
("The public sector is currently plagued with a wobbling fiscal position, an inevitable outcome of a weakening economy and declining tax revenues. Additionally, most of the state-owned banks and so-called semi-financial institutions have been seriously weakened by the financial burden imposed upon them by the previous government's free spending and giveaway campaigns.The upshot is that fiscal policy is subject to a rigid constraint, as a severe limitation has been imposed upon them by the relative scarcity of fiscal and financial resources available.")
12. How has the strong baht helped to reduce inflation?
By keeping energy prices low.
("Inflation has not been a serious threat over the past years, in spite of soaring energy prices and rises in transport and distribution costs. The situation could have been worse had it not been for the working of the strong exchange rate of the baht, which operates to prevent domestic energy prices from going up as high as they could, and would, have. Against the generally unpromising economic backdrop, this could almost be regarded as a bright spot.")
13. What negative effects has the strong baht had on the economy?
In theory, if exports become less competitive on international markets, this leads to reduced export production (now 60% of GDP), and this leads to increases in unemployment and decreases in GDP.
("The trouble with the strong baht is that it tends to make for a decline in our exports of goods and services and a rise in imports. This has the effect of depressing our domestic income, production, output and employment.
The reduction, in turn, leads to a fall in consumption and investment expenditure as a result of lower household income and business profitability, thus setting off further rounds of decline in income, production, output, employment, and consumption and investment, until the process finally comes to an end through the income-expenditure interacting mechanism.")
14. How has the yen historically helped to alleviate baht appreciation against the dollar? What's happening this time around?
The yen has tended to move in the opposite direction of the dollar, so a decrease in more expensive (less competitive) exports to the US was usually offset by an increase in less expensive (more competitive) exports to Japan.
This time the baht appreciated against both the dollar and the yen making Thai exports potentially less competitive in both markets. Recent improvements in the Japanese economy has prevented the deceleration of Thai exports to Japan.
("This situation has been the outcome of many complex circumstances and an interplay of a host of variables. In the first place, we are being squeezed by a weak dollar as well as a weak yen. Historically, the dollar and the yen moved in opposite directions. As a result, the adverse effect of the former on the performance of our external sector, in terms of exports and imports, was usually and, to a large extent, negated by the latter, and vice versa.
"Strangely, the current situation is one in which dollar is weak against the baht and the yen is weak against the dollar and also against the baht. So, conceptually, our exports are supposed to be discouraged while imports encouraged.
"Fortunately, Japan's economy has been recovering from its lengthy doldrums. Its increasingly more robust economy has prevented the growth of our exports from decelerating as much as they would have.")
