Populism trumps productivity in
Thailand By William Barnes
BANGKOK - Thailand finds itself stuck in a
middle-income trap of mediocre economic growth
aggravated by the combination a "capital strike"
by Thai business owners and populist policies that
threaten to distort the broad economy's pricing
and competitiveness.
Prime Minister
Yingluck Shinawatra's government's hotly debated
introduction of sharply higher minimum wages and
other populist pledges fail to touch on the deeper
problem of local capitalists' unwillingness to
lift the economy to a level where increasingly
productive workers can command higher pay.
Ever since the 2001 rise of former premier
Thaksin Shinawatra, Thai governments routinely
fire up fiscal engines to make good on populist
campaign promises following their electoral
successes. Yet the country's political elite seems
barely aware that in
important and debilitating
ways economic development has stalled.
In
the decade to 2010, gross domestic product (GDP)
grew on average 4.4% per year, around half the
regional average. Populist handouts, even when
well-intentioned to address stubborn income gaps,
are of scant use in raising national
competitiveness, a number of Thai experts say.
Central bank governor Prasarn
Trairatvorakul recently said "I understand that
politicians need to ... secure their popularity.
But there is also a need to consider long-term
challenges." He flagged substandard education,
alarmingly low allocations to research and
development and an aging population.
Prasarn also warned "high-labor" companies
they would have to revamp their operations or shut
down. Yet the governor may have overlooked a more
critical and chronic problem.
Corporate
profits are plentiful in Thailand and banks are
awash with liquidity. Yet for the past decade most
companies have merely pocketed profits rather than
invest in long-term growth strategies.
Unemployment is near zero but real wages have
barely risen in a decade.
"There is a
deliberate effort by everyone to maintain a return
on capital, in other words to maintain the
scarcity of capital. And therefore real wages
haven't gone up. That's the only way I can explain
it," said Supavud Saicheau, a prominent economist
and managing director (research) of local
brokerage Phatra Securities. Corporate
reluctance to invest has not surprisingly resulted
in generally very weak productivity gains. That
has been especially dire in the important
job-creating services sector, as recent World Bank
research has noted.
In the last dozen
years, manufacturing as a share of GDP has risen
from around 30% to 40% while employing a roughly
constant 15% of the workforce. Over that same
period, real wage levels have crawled up between
3% and 4% whereas the overall output of the
economy has increased by 50%.
Supavud
blames the 1997 currency crash and financial
crisis that technically bankrupted a wide swathe
of Thai businesses for teaching too good of a
capital lesson.
"Before the crisis, Thai
capitalists were really wasting capital based on
the belief that growth would always be there so
you had better grab the growth, grab the market
share and make money. You didn't care about the
consequences," said Supavud.
"All that
ended in tears and the capitalists took a big hit.
And after that the capitalists started to conserve
capital, [to be] very careful with their
investments maintaining a high return on capital
at the expense of labor ... They are not being
evil, it is just self-preservation," he said.
This could explain the economic paradox
that most real wages have barely increased even
though official unemployment has fallen to near
zero. As Thailand's economy bounces back from last
year's devastating floods, towns across the
country are now plastered with "help wanted" ads.
But the productivity figures tell a
different, cautionary tale. In the first half of
the 1990s, productivity increased by a robust 8.3%
a year in Thailand, according to the Asian
Productivity Organization. This fell to almost
zero (0.1%) before and after the boom from
1995-2000. Since then, productivity has picked up
but only to about 2.5% a year over the period
spanning 2000-2008. Productivity growth has
remained stagnant in more recent years.
Thailand has now missed out on nearly two
decades of the fast productivity growth that once
promised to lift the country to the status of a
high income, newly industrialized economy, similar
to the climb up the value-added ladder seen in
Japan, South Korea and Taiwan.
Meanwhile,
the years of easy growth derived from cheap-labor
exports and farmers leaving their fields for
industrial work are well over for Thailand. The
expected economic opening of Myanmar, Thailand's
underdeveloped neighbor, also threatens an exodus
of low-wage migrant workers.
To be sure,
climbing the value-added ladder represents a
significant policy challenge. Neighboring Malaysia
has had similar problems with chronically low
investment, though with a much higher wealth base.
Malaysia's per capita GDP is more than twice
Thailand's; service sector-driven Singapore's is
10 times higher.
A combination of
reluctant investors and an unusually high number
of workers in the informal sector has produced an
economic mix that has been toxic to development,
said Sethaput Suthiwart-Narueput, managing partner
at Advisor Company Ltd and a professor at
Bangkok's Sasin Graduate School of Management.
Out of a working population of about 38
million, some 21 million such as farmers,
taxi-drivers and others do not receive a regular
income. Of the remaining 17 million, only nine
million are paid a monthly salary while the other
eight million receive a daily wage.
"We
have a lot of workers who are working on a daily
basis, getting paid day to day, so the likelihood
that business owners will want to invest in these
people - training and technology and so on - is
really quite low. This contributes also to low and
lackluster wage growth," said Sethaput.
Economic blind spot Economic
research shows that when skill levels are
generally weak, due in part to low corporate
investments as well as a laggard educational
system, the large pool of informally employed
workers acts as a drag on monthly salaries.
Cheap foreign workers, currently numbering
over three million by some estimates, may have
taken a few, often undesirable jobs away from
low-skilled Thai workers. But academic studies
suggest they have not significantly dragged down
Thai pay rates, at least not directly.
In
the 1960s and 1970s, Thailand notched years of
rapid growth by simply luring peasant farmers to
work in factories, where productivity was then
relatively high. Now, many former farmers are
returning to their provincial fields to escape the
high costs of urban living and profit from a new
populist scheme to boost rice prices above market
levels.
Curiously, the Thai establishment
has been oddly sanguine about the lack of
investment.
A white paper on economic
strategy produced under the auspices of a key
adviser to former prime minister Thaksin
Shinawatra, Pansak Vinyaratn, argued that "native
ingenuity" would help maintain output in the
absence of significant new investment. The same
paper confidently expected investment to pick up
at some point; that was eight years ago.
"I don't think they even know this is a
problem or define it as a problem," said Supavud,
referring to the political response to the chronic
lack of investment.
Then, as now, the
government's emphasis has been on giving
grass-roots voters higher spending power in the
apparent hope that more domestic consumption will
generate greater productivity.
Economic
experts agree that recalibrating Thailand's
traditional reliance on exports, which now account
for around 70% of gross domestic product, is
important. They also believe the current
government policy of hiking minimum wages to
increase labor's share of the economic pie will
ultimately fail in an externally oriented,
market-driven economy.
"You can't
legislate or regulate your way to prosperity by
increasing statutory minimum wage levels," said
Sethaput. "If you could do that you wouldn't have
poverty anywhere in the world because everybody
would just regulate or legislate their way to
prosperity. It just doesn't work."
Given
the political furor over the current Yingluck
government's populist handouts and programs, a
more significant worry is that successive
governments have not spent enough on
growth-promoting capital investments.
Whereas two decades ago official capital
investment in Thailand accounted for about 10% of
GDP, it now accounts for around 5% by some
measures, even as overall budgets have ballooned.
Planned big-ticket capital investments,
including more-modern rail networks, could help if
they are not squeezed out of the budget by prior
populist spending promises or subject to the
traditional long delays in implementing such major
infrastructure projects.
American
economist Paul Krugman won notoriety in the region
in 1994 by suggesting Asia's growth owed more to
perspiration and weight of numbers than
inspiration. He had similarly warned the region's
economies in 1997 that "Productivity isn't
everything, but in the long run it is everything."
By 2010, after more than a decade of
anemic investment, the International Monetary Fund
warned that Thailand had "lost much of its former
dynamism". The rise of China and other regional
competitors for foreign direct investment (FDI)
has eroded Thailand's once privileged position as
one of the region's few open, investment-friendly
economies.
Sethaput said the problem
besetting Thai capitalists is that many can't see
a clear path ahead.
"It might be something
a bit ... existential. The growth story driving
Thailand back in our golden years of high
investment was fairly clear: labor intensive
industries producing for export with FDI [foreign
direct investment] from various places drove
that," said Sethaput. "But that story doesn't play
that well now because you have other places like
that now, such as Vietnam. Where are the growth
drivers in Thailand going to be? It is not as
clear."
This is awkward at many levels,
not least the political one. A great swath of the
Thai electorate, inspired by populist promises and
messages, now have middle-class aspirations but
the lack the skills to compete in a global
economy.
The Asian Development Bank warned
last year that many emerging economies run the
risk of becoming stuck in middle-income traps,
characterized by bursts of rapid growth followed
by periods of stagnation or decline. All
indications are that Thailand is now firmly stuck
in that trap without the political vision to
escape.
William Barnes is a
veteran Bangkok-based journalist.
(Copyright 2012 Asia Times Online
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