Thailand's new economic logic
Thailand's new economic logic
by Shawn W Crispin
BANGKOK - Thai Prime Minister Surayud Chulanont says his interim government has launched a "year of great reforms", with changes aimed at putting the economy on a more sustainable long-term track. Many foreign investors, on the other hand, are howling that recent government policies are woefully out of step with market mechanisms and, if not reversed, could eventually cause Thailand's economic demise.
So who's right? In an effort to erase ousted prime minister Thaksin Shinawatra's legacy, Thailand's new military-appointed government is indeed leading the country in a fundamentally different economic direction. Foreign investors and the market-fundamentalist Western media have roundly blasted Bangkok's recent decisions to impose capital controls, limit foreign ownership for certain service-sector investments, and broadly implement King Bhumibol Adulyadej's untested "sufficiency economy" concept.
Many investors voted with their feet when the capital controls were first imposed in mid-December, driving down the Thai bourse 18% in a single day. But after equity investors were exempted from the controls, the stock market has recovered most of those losses, and now big foreign hedge funds have flocked to Bangkok to seek out potential opportunities amid the policy confusion.
Meanwhile, the Thai currency, the baht, has continued to appreciate against the US dollar, trading at a recent high of about 33 to the greenback in offshore markets despite the capital controls on currency transactions. After introducing widely perceived nationalistic amendments to the Foreign Business Act in early January, major export-oriented multinationals, including China's Huawei, Japan's Panasonic and the United States' Ford, have since made major new commitments to their Thailand-based operations.
If Thailand is headed for economic doom, it's not yet apparent. Rather, a grudging consensus is emerging among more seasoned Thai observers that there is a technocratic logic to the government's thinking. Although not admitted publicly, the capital controls policy was likely designed as preemptive action against an anticipated major global economic shift: the steep and long-term decline of the US dollar and economy.
The Bank of Thailand is not the region's only central bank grappling with the financial wisdom of accumulating ever more US-dollar-denominated assets. For China, which has accumulated more than US$1 trillion in foreign denominated reserves, or nearly 42% of its gross domestic product (GDP), through years of runaway trade surpluses is actively pursuing new ways to hedge its massive stock of depreciating dollars.
Albeit on a smaller scale, it's an equally important issue for the region's other export-geared, dollar-earning economies, including Malaysia, Singapore and Thailand, where respectively exports account for 108%, 197% and 70% of GDP. That Thailand is now partially turning away from the openness that previously fueled its economic boom, bust, and recent strong recovery is particularly significant. And it could yet herald a broad regional move away from reliance on Western capital and export markets and toward more inward-looking and even protectionist economic strategies.
Historical vanguard
If so, it wouldn't mark the first time that Thailand was on the vanguard of a
sweeping regional economic trend. Throughout the 1980s and 1990s, Thailand was at the
front edge of Asia's export-driven economic emergence. Then, Japanese multinational
corporations rapidly transformed Thailand's backwater economy into an export-fueled
global powerhouse. Thailand also famously led the region into financial crisis in
1997, when foreign investors perceived cracks in the debt-driven facade and
underscored the economic risks to developing economies of unregulated short-term
capital flows.
Thailand's new direction is partially a nationalistic reaction to that bitter experience, driven a decade later by traditional elites now represented in government. The prevailing confusion surrounding the sudden implementation of capital controls and anti-foreign amendments to the Foreign Business Act, followed by earnest assurances by senior officials that Thailand will continue to engage with the global economy, has purposefully obfuscated the government's inward-looking intentions.
The Bank of Thailand has somewhat disingenuously maintained that the motivation for imposing capital controls was to protect Thai exporters from an appreciating baht. Yet Thai exports surged 17% last year, higher than consensus projections and in spite of a 15% appreciation of the baht against the dollar. The more complicated explanation for the central bank's move is precisely the opposite: that Thailand is now exporting too much, not too little.
Respected Thai economist Supavud Saicheua - on all accounts a dedicated free marketeer - makes that contrarian argument in an exceptional new research report, in which he argues that Thailand can no longer find efficient ways to allocate all of the US dollars it is earning through record levels of exports. He argues that with exports now accounting for 70% of GDP - more than double China's 34% ratio, and well over the world 24% average - Thailand is long overdue for a structural economic adjustment.
To be sure, buoyant exports sparked economic growth and helped to restore the national accounts after the 1997 financial crisis, allowing Thailand to pay back the International Monetary Fund two years ahead of schedule, and shave external debt down from a crisis high ratio of 90% of GDP to its current level of about 34%.
With those external bills now paid, and the previous government's various import-intensive infrastructure spending plans put on ice, exports are now arguably generating more dollars than the Thai economy can efficiently absorb - similar to the inrush of foreign capital that inflated Thailand's 1997 bubble, yet different in that the foreign-denominated flows are being earned rather than borrowed.
Equitable economics
Enter King Bhumibol's "sufficiency economy" concept into Thailand's new policy mix.
The government's precise ideas for implementing the revered monarch's widely
misunderstood philosophy are now starting to come into sharper focus. And they appear
to jibe with the wider academic literature dedicated to sustainable economic
development, which contrary to Western capitalism's drive for short-term maximum
profits, strive for the long-term optimal use of resources.
It's literature that's just now beginning to get a serious second reading, with the emerging global consensus surrounding the risks of greenhouse-gas-driven global warming, and related realizations that multinational manufacturers' operations often recklessly degrade the natural environment of less litigious and lightly regulated developing countries. [1]
"The sufficiency-economy philosophy is a Thai model for sustainability, the importance of which is only now becoming recognized around the world," Surayud said last week to a meeting of the Joint Foreign Chambers of Commerce. "As an early adopter of a sustainable approach to development, Thailand should, I believe, be praised, for it is on a path down which every country or company will have to travel sooner rather than later."
This week, Surayud called on Thai industrialists to begin implementing the monarch's concept, namely through risk-management tools that allow for greater flexibility and minimize debts, greater investment in human resources and research and development, and setting business targets focused more on long-term rather than short-term returns. The royalist premier also suggested that - contrary to the global capitalist order - Thai factory owners should refrain from taking advantage of consumers, labor, or material suppliers.
Significantly, Surayud's government is re-exerting sovereignty over Thailand's future economic direction from a position of economic and financial strength - providing crucial insulation to a market backlash against its contrarian philosophy. While imposing capital controls on certain types of foreign inflows, the Bank of Thailand in January more quietly eased longtime restrictions on Thai nationals investing abroad, allowing mutual funds and securities companies to invest as much as $50 million offshore without central-bank permission. Depending on the eventual implementation, Thailand could soon emerge as a net exporter, rather than net importer, of capital.
At the same time, the combination of capital controls, amendments to the Foreign Business Act, and the rescinding of government concessions to Thaksin's publicly listed companies will all inevitably spook certain investors and lead to less short-term capital inflow. It's clearly a risk a more discerning Thailand is willing to take in the pursuit of more sustainable growth and protection against foreigners exporting future economic volatility from Western to Thai shores.
For better or worse, Thailand's emerging economic model is one many regional governments will likely give a long, hard look in the months and years to come.
Note 1. Thailand's predominantly foreign-invested electronics sector contributes a substantial 35% to total national exports, but independent studies have found that few properly dispose of their toxic waste. As of 2001, less than 10% of the hazardous industrial waste produced in Thailand was properly stabilized, processed and disposed of.
Disclaimer
posted by Chazzsongs at
5:41 AM
