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Thailand:
Dual track to recovery
By Daniel Lian
 Prior
to the 1997-98 Asian crisis, Thailand was viewed by the global investment
community as one of the more promising blue-chip emerging markets. Its
attractions were underpinned by rapid export-oriented industrialization and an
aggressive expansion of the domestic capital markets. However, from the time
the crisis started in July 1997 until Prime Minister Thaksin Shinawatra's
electoral victory in January 2001, the country had been languishing and was
increasingly being labeled - alongside Latin America - as a market offering
poor growth prospects, hampered by a bad-debt and bad-asset overhang that was
threatening its fiscal sustainability and stifling credit creation.
Investors were concerned that the country had encountered a protracted period
of stagnation followed by asset deflation. As a consequence, both foreign
direct investment (FDI) and foreign portfolio investment dried up, and both
household and business confidence was destroyed. Thailand was in a doldrums.
Thailand's problem was that it had followed too closely the East Asia Economic
Model (EAEM), which focused on attracting FDI from multinational corporations
(MNCs) interested in mass production of manufactured goods. Thailand was
placed, alongside other developing countries, in the generic "labor rich,
capital poor" camp, and prescribed the standard export model. While it is true
that Thailand was labor rich and capital poor, this simplistic grouping ignored
certain strengths of its economy.
The first chapter
The Thai economy has shown tangible cyclical as well as structural progress in
the two years since Thaksin assumed office in January 2001 despite the
persistent gloom and doom predictions by Thaksin skeptics and analysts. We view
this period as the first chapter of Thaksin's economic strategy. The major
economic initiatives and tangible progress are mainly in four areas.
First, pursuing a new economic strategy that avoided direct competition with
China and secured pricing power, Thaksin engineered a dramatic shift in
Thailand's economic development strategy when he assumed office in 2001. This
shift was aimed at steering the Thai economy away from the defunct single-track
EAEM that was excessively dependent on FDI by MNCs and mass manufacturing, to a
more balanced dual-track development model. Such a dual-track option involved
the simultaneous pursuit of certain types of mass-manufacturing facilitated by
FDI by MNCs (automobiles and auto parts clearly represent one such sector) as
well as the second track through the skill-driven small and medium enterprise
model (SDSME).
On the one hand, the dual-track model encouraged certain types of foreign
investment, particularly in the manufacturing sectors where Thailand had
already built up a critical mass and would not require government subsidies.
Steady production in such sectors would ensure employment and export income
while the economy restructured. The Thai government was determined not to
commit vast national resources to subsidize MNCs indiscriminately. On the other
hand, the SDSME enabled Thailand to find pricing power through developing
products and services that utilized embedded indigenous skills. In this way, it
could shed its dependence on MNCs and the global investment cycle.
The second strategy was to pursue "managed" asset reflation by helping the Thai
economy to circumvent deflation and transit to a new development model. At the
beginning of Thaksin's tenure, the Thai economy faced a considerable deflation
threat stemming from the bursting of its inflated bubbles that built up from
the late 1980s to 1996. The economy endured significant and protracted asset
deflation from 1997 to early 2002. Persistent asset deflation greatly
diminished the value of corporate assets, limiting the corporate sector's
ability to participate proactively in economic expansion. It also reduced the
collateral value of assets pledged by the corporate sector to the banking
system, worsening the non-performing loan problem and making the banking system
reluctant to increase credit to participate in the economy. Deflation further
reduced the value of assets held by the Thai Asset Management Corp (TAMC) and
other private asset managing companies within the banking system, making
corporate restructuring and fresh banking lending difficult.
The third strategy was to pursue a domestic demand-led growth strategy to
ensure steady cyclical growth while the economy underwent restructuring.
Clearly the shift from the single-track model to the new dual-track option was
not going to produce an instant economic miracle. The successful implementation
of SDSME would take time, and pricing power would be difficult to achieve.
However, the pursuit of "managed" asset reflation complements domestic
demand-led initiatives and makes steady cyclical growth possible during the
difficult phase of economic restructuring. While the initial dose of fiscal
stimulus has been unfairly labeled "fiscal imprudence" and "populist", careful
analysis reveals that such a policy is designed to leverage the potential of
the following three economic drivers:
Tapping the consumption potential of the under-leveraged and rural household
sector.
Boosting rural incomes and finding new economic winners through an expansion in
skills-driven SME activities.
Mobilizing the substantial but unfulfilled housing demand potential of mid and
low-income households.
Converting tangible assets owned by the self-employed lower class and agrarian
class previously intermediated only by the informal finance sector (the lack of
legal title is a major hindrance) into pledgible assets accepted by the formal
financial system.
The fourth strategy was to pursue reforms to strengthen the domestic economy.
Considerable progress was made in strengthening the efficiency and
competitiveness of the domestic economy. I highlight three areas:
Strengthening the banking sector through the formation of the TAMC.
Bolstering the fiscal sector through the fiscalization of losses.
Improving the efficiency of the public sector through privatization and
management reform at the 44 state enterprises and bureaucratic reform of the
civil service.
The second chapter
The second chapter was about surviving China's intense competition and
circumvents the deflationary biased mass manufactured export battle with new
economic winners.
Competition from China and deflation threats loom large. If global growth and
the trade environment were favorable, it would be much easier for Thailand to
continue its four-pronged strategy, as it could afford to gradually shed its
dependence on mass-manufacturing in favor of identifying niche winners with
pricing power through indigenous skills and resource driven SMEs.
Unfortunately, the global environment is likely to turn out to be even harsher
in 2003. While traditional deflation, ie outright decline in general prices,
may not prevail, in the case of Thailand the sharp deterioration in export
pricing power and export income earned by the mass-manufacturing sector may
outweigh the gains in the number of successful SMEs and their niche pricing
power in 2003.
Two risks are worth noting. First, disinflation continues to intensify
everywhere on earth and Thailand is not immune to the global deflation threat.
Second, Thailand remains export-oriented and quite dependent on
mass-manufactured exports. While sticking to the four areas of economic
initiatives should remain the major thrust of Thaksin's economic agenda,
preserving asset reflation and domestic demand could become crucial in 2003 if
global deflation and the deflation-biased mass-manufactured export battle
intensifies.
Rural development remains a core strategy in the second chapter. In a nutshell,
Thailand needs to create economic resilience through creating domestic
production for both domestic consumption and exports. Boosting rural incomes
and expanding skills-driven SME activities is an integral part of the process.
The ultimate objective is investment and not merely private consumption. The
rural sector possesses a vast potential for SME development as well as for
private consumption. Private investment for the past few decades has been
largely geared to old businesses concentrated in the Greater Bangkok area. Some
40 percent of merchandise exports are carried out by SMEs and yet they account
for a tiny percentage of total bank lending. Other than continue to be
aggressive in providing seed capital to start-ups and financing investment
through specialized government financial institutions, the banking system
clearly needs to be more aggressively mobilized to fund SME activities. The
stronger multiplier impact (evidenced in 2002 growth) of a further boost in
rural incomes will be critical in supporting cyclical growth in 2003 given the
threat of deflation.
The bottom line is that the dual strategy of asset reflation and domestic
demand-led growth must continue in 2003. Thaksin has successfully put in place
the first chapter of the economic transformation for Thailand by initiating a
four-pronged restructuring approach. The skill in the first chapter lies in
Thaksin's ability - against all odds and economic convention - to implement the
most profound and proactive response to the inevitable and rapid rise of China
as a global factory and the demise of the single-track EAEM. The first chapter
makes a good read because Thaksin has outwitted many other more established
Asian policymakers, who still dream about sharing factory space and economic
prosperity with China through the single-track EAEM.
The second chapter is not going to be easy for Thaksin. While it is clear from
a structural development perspective that there is no turning back from the
dual-track model as it is the "right" model to promote small economic winners,
there is, however, still an insufficient number of small winning enterprises
and pockets of pricing power to augment Thailand's standard of living. The
second chapter is thus about how Thailand can balance the twin objectives of
cyclical stability and soldiering on along the dual track to find new economic
winners through its indigenous strengths.
Deflation and a worsening global outlook mean that it is too early and too
risky to set the dual-track strategy on autopilot, and the interim policy of
asset reflation and domestic demand-led growth must continue in 2003.
Daniel Lian is an international financial consultant based in Singapore.
(Copyright Heartland. This version has been edited by Asia Times Online.)
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