SPEAKING
FREELY Thaksin's populist economics buoy
Thailand By Jephraim P Gundzik
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Thai
Prime Minister Thaksin Shinawatra was elected in 2001 on
a strongly populist economic platform now widely
referred to as Thaksinomics. Since that time, Thaksin's
populist policies have succeeded in producing rapid
economic growth. The only factor that could derail
Thailand's economy is the remote risk of social
instability.
Replicating the leftward political
shift that has swept over Latin America in the past
several years, Thaksin's Thai Rak Thai (TRT) party won a
landslide victory in Thailand's 2001 general election.
The electorate's strong disaffection with former prime
minister Chuan Leekpai's pro-International Monetary Fund
(IMF) economic policies was instrumental to Thaksin's
victory.
Thaksin capitalized on this
disaffection by campaigning on a populist platform that
included the reversal of several key IMF policies. The
TRT pledged to improve rural living conditions through
new subsidized loans and the creation of a debt
moratorium for farmers. In addition, the party pledged
to improve the nation's health-care system.
Thaksin, reputably Thailand's wealthiest man,
also pledged major changes for his country's business
sector. Economic liberalization demanded by the IMF
threatened many of Thailand's wealthy elite in both the
private and public sectors. Thaksin promised to create a
debt-management company to remove bad assets from the
country's banks and eliminate significant amounts of
private- and public-sector corporate debt.
Thaksin also hinted that he would oppose
IMF-dictated bankruptcy legislation that would have
closed many Thai companies. And he also alluded that he
would reduce foreign investment in Thailand to protect
domestic companies.
Populist shift goes
global Interesting parallels and differences
exist between the populist shift in Thailand in 2001 and
the populist shift in Brazil in 2002.
Brazilian
President Luiz Inacio Lula da Silva's campaign theme in
Brazil was almost identical to Thaksin's, producing a
similar electoral outcome. Both Thaksin and Lula enjoyed
strong popular support after their respective electoral
victories. Unlike Lula, however, Thaksin has managed to
fulfill many of his populist campaign promises.
Lula has taken the opposite track, embracing the
previous government's IMF-mandated economic policies.
Whereas Thaksin continues to enjoy strong popular
support, running around 65%, Lula's personal popularity
has declined. Support for Lula's government also has
plummeted.
Thaksin has consolidated his
political position and now controls an overwhelming
majority of parliamentary seats. Meanwhile, President
Lula's coalition government has begun to fracture.
Economic developments have been equally divergent in
Thailand and Brazil.
As is typical of countries
following IMF-dictated policies, economic growth has
remained weak in Brazil. In contrast, Thailand, which
has eschewed IMF-policies under the Thaksin government,
has seen sharply accelerated economic growth. Real gross
domestic product (GDP) expanded by 5.4% in 2002.
Economic growth accelerated to 6.8% last year and should
top 7% this year.
Economic crisis
ahead? Ironically, the renewed strength of
Thailand's economy has led many analysts to speculate
that the country is heading for another economic crisis.
However, the risk of a repeat of the 1997 Asian
financial crisis is low. Both credit and investment are
shadows of what they were in the mid-1990s. More
important, the banking system's huge net
foreign-liability position has reversed.
Strong
growth of consumer credit in Thailand over the past two
years has unduly raised alarms. Credit-card debt grew by
almost 80% in 2002 and 30% in 2003. The growth of
credit-card issuance was similar over the same period.
However, at the end of last year, credit-card debt
remained less than 2% of total bank credit outstanding.
Ongoing problems with non-performing loans has
contained total bank credit growth since the economic
crisis. The government's assumption of private-sector
debt through its bank-bailout plan has dramatically
reduced the stock of private-sector credit. Bank credit
to the private sector has declined from 133% of GDP in
1996 to 86% of GDP at the end of last year.
One
of the most negative consequences of the IMF's economic
policies in Thailand was the collapse of private-sector
investment. Though private-sector investment grew
strongly last year and is expected to accelerate further
this year, this growth is hardly indicative of economic
overheating.
Private-sector investment accounted
for 32% of expenditure-based GDP in 1996. Last year,
private-sector investment accounted for only 15% of GDP.
It will take many years for the stock of credit
to regain its pre-crisis level given the problems
private sector banks continue to face with distressed
assets. Overall credit growth will be restrained by
these distressed assets for several years. It will also
take several years of rapid growth before private-sector
investment regains its pre-crisis level.
Yet,
another economic crisis driven by over-extended
consumers and unproductive investment is improbable over
the next several years. An economic crisis sparked by
the sudden withdrawal of external liquidity, as occurred
in 1997, is impossible.
Ensuring the strength
of economic growth Thailand's economic crisis in
1997 was ignited by the refusal of Thailand's foreign
creditors to roll over short-term loans to the country's
banks. In 1996, the banking system's net foreign
liabilities approached US$50 billion (2.065 trillion
baht) twice the amount of the Bank of Thailand's
foreign-exchange reserves.
At the end of last
year, Thailand's banking system had net foreign assets
of almost $7 billion. As implied by the reversal in
banks' net foreign-liability position, private-sector
external debt in Thailand declined from $92 billion in
1996 to only $35 billion at the end of 2003.
Public-sector external debt has also dropped from its
peak of $36 billion in 1999 to only $17 billion last
year.
Thailand is in a much better credit
situation now than it was in 1996 when foreign banks
were tripping over themselves to lend money to the
country. This should allow the country's private-sector
enterprises to access external credit in order to
finance future investment, ensuring that economic growth
remains strong.
With all eyes on credit and
investment, scant attention is being paid to political
and social developments that could, if unchecked,
eventually slow economic growth and resurrect problems
in the banking sector.
Thaksin's commanding
political position is breeding policy arrogance that
resembles autocracy. This is raising serious concerns,
both internationally and at home, about the Thaksin
government's commitment to democracy.
Thailand
has a strong history of popular revolt against
autocratic rulers. The prime minister would be well
served to keep this in mind during his next term.
Jephraim P Gundzik is president of
Condor Advisers Inc. Condor Advisers provides
emerging-markets investment risk analysis to individuals
and institutions worldwide. Please visit www.condoradvisers.comfor
further information.
Speaking Freely is an
Asia Times Online feature that allows guest writers to
have their say. Please click hereif you
are interested in contributing.
