Fiscal transparency, sufficiency economy,
and the 2007 draft constitution
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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A new Thai constitution has been drafted.
The new constitution directly addresses several important economic issues neglected in the past.
Probably the most important issue is transparency in government spending (fiscal transparency).
One major criticism levelled against the Thaksin administration was that: 1. it spent money to gain popularity, but at the same time, 2. hid this spending to prevent a large visible budget deficit that wouldn't look good to voters.
A previous Bangkok Post article described government spending during the Thaksin adminsitration as "hidden debt build-up over the past three or four years."
Today's article provides a short overview of all the important economic issues covered in the new draft constitution.
The Thai people will vote on this constitution soon and either accept or reject it.
For further reading, read the whole draft constitution in English.
On the Sufficiency Economy Philosophy, read the UNDP's Thailand Human Development Report 2007 : Sufficiency Economy and Human Development authored by historian of Thailand Dr. Chris Baker.
Read a previous Bangkok Post article on Stiglitz and the Scandinavian Model.
Read Wikipedia on different forms of government failure applicable to the Thaksin era such as Pork barrel spending, rent seeking, the political business cycle, and the work of economist Kevin Grier on the political business cycle.
The New Mandala Blog at Australian National University is a good source of information on the new draft constitution as well as critical assessment on its rural impact.
Check out information and guidelines on fiscal transparency at the IMF.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What broad policy guidelines will become official law in the new constitution?
2. Why was the 1997 constitution named the "People's Constitution" ?
(Look at vocabulary definitions)
3. What limited aspects of economics did the 1997 constitution address?
4. What major economic events since the drafting of the 1997 constitution have caused many people to rethink economic policy?
5. What is new and unique about the new constitution that is being drafted?
6. What practice of the Thaksin administration prompted the new economic focus of the draft constitution?
7. Why did government-owned banks increase lending during the Thaksin administration, according to the author?
8. What are some of the Thaksin administration's so-called populist programmes?
9. Why do some regard these populist programmes as bad for the country? Why do some regard them as good?
10. Which parts of the draft constitution address fiscal discipline?
11. What about fair tax laws? Sufficiency economy? Good corporate governance?
12. What factors could cause problems for the government as the proportion of elderly in society increases in the future?
13. Does the traditional system of children supporting their parents in old-age still seem to be followed in Thailand? (Cite evidence)
14. Does adopting the Sufficiency Economy philosophy mean that the current so-called "free market" based system will be rejected for a socialism-based system?
15. What part of the world has economies that can serve as a model for the Sufficiency Economy philosophy? (Use a little inference here)
Bangkok Post Article March 28, 2007
Chartered economy
The draft constitution comes with a lengthy to-do list for future governments dealing with fiscal policyWICHIT CHANTANUSORNSIRI
Sufficiency economics, fiscal discipline, retirement savings and good corporate governance are among the key principles mandated in the new draft constitution.
The new draft, which will face a public referendum later this year, reflects the profound political and social changes that have occurred since the "People's Constitution" was promulgated in 1997.
That constitution, written at the height of the economic boom in the 1990s, focused relatively little attention on economics, save for a reaffirmation of Thailand’s commitment to free markets and an open society. But the Asian economic crisis, followed by Thaksin Shinawatra’s free-spending development policies, caused many to rethink the country’s economic direction.
Pisit Leeahtam, a former deputy finance minister under the Chuan Leekpai government and now a member of the Constitutional Drafting Assembly, said the draft constitution would be the first to clearly outline the country’s commitment to fiscal stability and discipline.
"This reflects the concerns that have been raised over fiscal stability, particularly during the Thaksin Shinawatra government, when we saw a significant increase in the use of quasi-fiscal spending," he said.
Critics of the Thaksin government say the billionaire businessman pursued a populist policy agenda by encouraging state-owned banks such as the Government Savings Bank and the Bank of Agriculture and Agricultural Co-operatives to sharply increase lending to rural communities to curry political favour — something the current government is also now considering.
But others argue that programmes such as universal health care, village investment funds and the One Tambon, One Product initiative were noble in their intentions to alleviate poverty and raise rural income.
In any case, Dr Pisit said the new constitution would contain safeguards against budgetary tricks.
"We are trying to close the loopholes and not allow inappropriate fiscal policies," he said. "This will be the first constitution to stipulate in detail the importance of fiscal discipline. Any government that fails to comply would be subject to removal for failing to abide by the constitution."
Section 82 (4) of the draft constitution calls for the government to maintain monetary and fiscal discipline to ensure economic and social stability, while Section 77 (7) calls for authorities to manage public spending with consideration for the country’s fiscal position.
Other key sections of the constitution relevant to businesses and economists include Section 82 (3), which calls for a fair and just tax code that matches today’s economic and social conditions.
The new constitution also aims to improve transparency in budget management, with Section 163 calling on authorities to reveal specific budget details and Section 166 requiring the government to report to the Parliament on the use of funds generated by state agencies that are not remitted to the central budget.
Dr Pisit said another major change in this charter was the explicit call for the government to set aside funds for the elderly, an issue that will only become more pressing as people live longer.
The Social Welfare Fund, as well as voluntary provident funds and retirement mutual funds, currently provide a "safety net" for around 10 million people, or about one-third of the labour force. But the majority of the population now has no formal retirement savings plan, raising the prospect of significantly higher costs for future governments as the proportion of the elderly increases. Dr Pisit noted that while the population overall is growing by less than 0.5% per year, the share of the elderly has jumped more than 3%.
According to surveys in 2004, as much as 17% of the elderly population lives alone; of those, another 12% have no income and live in retirement homes. As much as 80% of the elderly must work to cover their daily expenses.
Section 82 of the draft constitution commits policymakers to support the principles of the sufficiency economy philosophy, another first for the country's constitutional framework.
"But even under sufficiency economics, Thailand will also continue to support a free, market-based economy under Section 83 (1). We do not see a contradiction in the two goals," Dr Pisit added.
Section 82 (2), meanwhile, calls for the support of ethics, values and good corporate governance. Section 82 (6) focuses on fair and just competition, safeguards against direct and indirect monopolies and consumer protection.
Sombat Thamrongthanyawong, the president of the National Institute for Development Administration and another constitution drafting member, said the draft calls for sufficiency economics to be balanced with a capitalist society.
"Sufficiency economics is a philosophy, not a theory. It is a concept that should be adopted for people's everyday lives," he said.
Dr Sombat said the draft constitution places heavy importance on public benefits, including sections on education, poverty alleviation and public welfare to help alleviate the stark differences in income in today’s society.
The move towards a system such as that used in the Scandinavian countries, where the government plays a large role in providing public benefits, differed sharply from populism, he said.
"Populism focuses on giving away money to build one’s popularity without consideration to the effects on the country’s economy," Dr Sombat said.
But demanding greater services from the state also means improving efficiency in tax collection and state revenues.
"Thai society is very much a pyramid, where a small few are extraordinarily rich and command power while the majority are poor. It's [politically] difficult to set tax policy collecting from the rich. As a result, one alternative is to help build the middle class to close the gap between rich and poor," Dr Sombat said.
Vocabulary (in discussion above)
Sufficiency economics, sufficiency economy philosophy - the economic philosophy based on the development ideas of His Majesty the King (See UNDP report and Wikipedia on localism in politics)
a chartered accountant - a qualified accountant, an official title for accountants who have passed certain tests and standards
a charter - an official document that describes the goals and rules of an organisation, like a constitution of an organisation
a chartered economy - probably a pun (or play on words) meaning: 1. that the new constitution will try to make government accounting and spending cleared as a "chartered accountant" would (during the Thaksin administration many items were put off balance sheet), and 2. a charter (constitution) for an organisation
play on words - (See Wikipedia on wordplay)
a pun - when two different meanings of a word are being used at the same time for a literary effect (See Wikipedia on pun and wordplay)
a draft - not yet official, still being written and revised, an early version that can still be changed
draft constitution - (See Wikipedia on Thailand's Constitution and the 2006 Interim Constitution of Thailand, and the draft constitution)
fiscal - related to government spending and taxes
fiscal spending - government spending
fiscal policy - government spending and tax policy
fiscal discipline - controlling government spending and taxation (and its impact on the economy)
the country’s fiscal position - whether the government of a country runs a budget deficit or surplus in any given year
stability - not changing suddenly (remaining steady, constant, and roughly the same, without jumping around and changing a lot)
volatility - changing suddenly in unpredictable ways (opposite: stability)
fiscal stability - when government spending does not change suddenly and unpredictably (from large populist programs near election time, for instance)
* economic and social stability
quasi- - looks like it is, but actually isn't
quasi-fiscal spending - money that the government spends but is not an official part of the government budget, so it looks like the government is spending a lot less
populism, populist - claiming to represent and defend the rights of the common people (note that the claim may not match reality, populist political platforms can also be used for personal gain)
populist policy agenda, populist policy programmes, populist schemes - the name commonly given to initiatives started by the Thaksin administration that provide benefits to the poor such as 30 baht healthcare, agricultural subsidies, a village fund of money, salary increases for teachers, or numerous other projects (insofar as money was handed out as gifts to keep Thaksin and the TRT in power without monitoring very well how it was spent, this government spending has been criticized by the current administration)
an initiative - a plan or project aimed at solving a problem
corporate governance - the running of modern corporations, "the set of processes, customs, policies, laws and institutions affecting the way 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" (See Wikipedia)
to-do list - a list of things that must be done (an informal list that people keep for themselves so they can remember important things that must be done)
x is mandated in the constitution - must do x because x is required in the constitution (x is the law)
a referendum - when the people are asked to vote on a government policy (to show whether they agree or not)
face a public referendum - when the public vote for or against a proposed law
profound changes - great changes
the 1997 People's Constitution - the first Thai constitution to be "drafted by popularly-elected Constitutional Drafting Assembly, hence was popularly called the "People's Constitution"...For the first time in Thai history, both houses were directly elected. Many human rights are explicitly acknowledged, and measures were established to increase the stability of elected governments" (See Wikipedia on the 1997 Constitution)
promulgate a law or constitution - officially adopt a law or constitution
reaffirmation - stating again to make sure it is very clear
commitment to x - agreement to keep doing or supporting x (even though circumstances may change and you might want to stop)
open society - government is responsive and tolerant, political mechanisms are transparent and flexible, the state keeps no secrets from the public, a non-authoritarian society, In Karl Popper's book The Open Society and Its Enemies an open society "ensures that political leaders can be overthrown without the need for bloodshed" such as a bloody revolution or coup d'etat to change the leaders. Democracies are examples of open societies whereas dictatorships are examples of closed societies (See Wikipedia on open society and Popper's book)
Asian economic crisis - a period of economic unrest that started in July 1997 in Thailand and South Korea and affected the currencies, stock markets, and other asset prices in several Asian countries (See Wikipedia)
Chuan Leekpai - the Prime Minister of Thailand from 1992 to 1995 and again from 1997 to 2001 (See Wikipedia)
Government Savings Bank - government bank that began operations in 1947, but whose origins go all the way back to 1913 (See history and website)
curry favour with x - do things to get the support of x (like give x a lot of money)
Bank of Agriculture and Agricultural Co-operatives (BAAC) - Thai government bank specialising in microfinance and banking for farming households (See website, a case study [pdf], at the FAO, and at microfinance gateway)
universal health care - the "thirty baht" health care program that Thaksin initiated, that provides affordable healthcare for everyone
village investment funds -
One Tambon, One Product (OTOP) - a program to stimulate and promote small business and entrepreneurship at the village level in Thailand, often by better marketing and developing existing local handicrafts and food businesses (See Wikipedia and a previous article on Japanese-Thai coperation in this area)
noble - superior, based on high moral principles
intentions - plans and ideas about what to do in the future
noble in their intentions - have plans based on high moral principles
alleviate - reduce (a bad thing like suffering)
alleviate poverty - reduce poverty, raise the living standard and income of poor people so they can live more comfortably
safeguards - policies to protect
loopholes - legal ways to get around a law (usually imperfections in a law that the people who made the law couldn't see)
close the loopholes - pass another law to end loopholes
stipulate - (See glossary)
* stipulate in detail
abide by a law - follow a law (do what the law says you should do)
the tax code - the tax laws
remitted to - sent back to deal with again
explicit - clear and open (easy to see and understand)
explicit call for - ask for clearly (in a way that everyone understands)
Social Welfare Fund - Social security fund run by the government with tax contributions from workers: "Some nine million workers count on the fund to provide them with a wide range of welfare benefits, including free healthcare and pension cover" (Source)
provident funds - a fund that pays benefits to employees after termination of employment. Contributions paid into the fund by both the employees and the employer are invested in accordance with the pre-determined condition of amount and risks
safety net - something to help you in unexpected difficult situations, medical insurance is an example (a large net that catches tightrope walkers who fall)
retirement homes - nursing homes, special places that look after edlerly people who no longer have anyone who looks after them
National Institute for Development Administration (NIDA) - a graduate school in Thailand specialising in business and economics founded in 1966 with with the help of Thammasat University and the Ford Foundation, the Institute was first responsible for teaching, training, conducting research and rendering library services for the benefit of National Development Administration, famous alumni include Somkid Jatusripitak, commerce minister under Thaksin (See Wikipedia and website)
Answer Key:
1. What broad policy guidelines will become official law in the new constitution?
a. sufficiency economics
b. fiscal discipline
c. retirement savings
d. good corporate governance
2. Why was the 1997 constitution named the "People's Constitution" ?
(Look at vocabulary definitions)
The group of people who wrote the constitution were elected by the people, not appointed.
3. What limited aspects of economics did the 1997 constitution address?
Reaffirmation of Thailand’s commitment to:
a. Free markets
b. An open society
4. What major economic events since the drafting of the 1997 constitution have caused many people to rethink economic policy?
a. The 1997 Asian Economic Crisis
b. Thaksin Shinawatra’s free-spending development policies
5. What is new and unique about the new constitution that is being drafted?
It is the first constitution that makes a committment to "fiscal stability and discipline."
6. What practice of the Thaksin administration prompted the new economic focus of the draft constitution?
The increase in the use of "quasi-fiscal spending" under the Thaksin administration (government spending that did not show up as government spending and was not reflected in the budget deficit).
7. Why did government-owned banks increase lending during the Thaksin administration, according to the author?
To gain political influence (curry political favour).
8. What are some of the Thaksin administration's so-called populist programmes?
a. Universal health care
b. Village investment funds
c. One Tambon One Product (OTOP)
d. Loans by state-owned banks
e. Many others.
9. Why do some regard these populist programmes as bad for the country? Why do some regard them as good?
Some regard these programmes as bad for the economy because they essentially bought political influence and votes and solidified the hold of Thaksin and the Thai Rak Thai party over the government. They were also often not included in the official budget so their cost was effectively invisible to the public.
Some regard Thaksin's populist programmes as good for the country (noble in their intentions) because they alleviated poverty and raised rural income.
10. Which parts of the draft constitution address fiscal discipline?
Fiscal discipline: Sections 82 (4), 77 (7), 163 and 166.
11. What about fair tax laws? Sufficiency economy? Good corporate governance?
Fair tax laws: Section 82 (3).
Sufficiency economy: Section 83 (1)
Good corporate governance: Section 82 (2)
12. What factors could cause problems for the government as the proportion of elderly in society increases in the future?
People are not saving for retirement. They have no formal retirement savings plan.
13. Does the traditional system of children supporting their parents in old-age still seem to be followed? (Cite evidence)
No, it doesn't.
a. 17% of the elderly lives alone.
b. 12% have no income.
c. 80% of the elderly must work to "cover their daily expenses."
14. Does adopting the Sufficiency Economy philosophy mean that the current so-called "free" market based system will be rejected for a socialism-based system?
No, sufficiency economics will balance capitalism (ameliorate its excesses).
("But even under sufficiency economics, Thailand will also continue to support a free, market-based economy under Section 83 (1). We do not see a contradiction in the two goals," Dr Pisit added...
"Sombat Thamrongthanyawong, the president of the National Institute for Development Administration and another constitution drafting member, said the draft calls for sufficiency economics to be balanced with a capitalist society.")
15. What part of the world has economies that can serve as a model for the Sufficiency Economy philosophy? (Use a little inference here)
Scandinavian countries. (See previous Bangkok Post article: Stiglitz on the Scandinavian Model)
