Thailand and the World Financial Crisis

During the last months of 2008, the Thai authorities' response to the global financial meltdown was sluggish, with no clear direction. This is largely due to the on-going domestic political turmoil.

In Thailand's case, the run-up to the global economic crisis was further complicated by the effect of the airports shut-down, which caused severe panic among the public and the business community — particularly the tourism industry.

The number of tourists fell by 21% on the year-on-year record. Also, up until the end of March, the demonstrations in the streets became more subdued when compared to what the previous government had to confront.

It is vital to note that the crisis which Thailand is now facing has not derived from financial mismanagement or unsound monetary or fiscal policies. It is essentially a result of its economic structure and long-term development strategy, which have been increasingly reliant on exportation and foreign investment as the engine of growth.

Export accounts for 70% of the national income. Total foreign investment in 2006 was $1.4 trillion while the GDP was $2.5 trillion in the same year.

Since November 2008, the year-on-year export level has been in decline for the last four months.

Even with the sharp increase in the export of gold, jewelry and ornaments due to high prices, policy makers went into a state of shock when it was revealed that the total export plunged by 26.4% in January 2009. External demand for electronics, auto parts, electrical appliances, agricultural and agro-industrial products has dried up.

At the same time, imports also plummeted by 40.3% in February, the sharpest drop in 11 years. This was not only because of the 20% contraction in consumption. The decline also happened in all categories of imports, especially energy (54.78%), capital goods, (23.8%), and raw materials (45.3%). These figures confirmed that the Thai economy is facing diminishing production and economic activities in general.

With the 26.4% reduction of exports Thailand is facing, the GDP would decrease by at least 5%.Considering that each 1% drop in GDP costs 200,000 jobs, Thailand will see it workforce become unemployed by a million within this year. This is unemployment due solely to primary export reduction.

The government has already admitted that, if nothing is done — or if the government stimulus measures fail to deliver — GDP could plummet by 9% and the total unemployment level could almost quadruple, reaching nearly 2 million, from 510,000 at the end of 2008.

This level of lay-off has not been seen since the Asian financial crisis of the late 1990s. Unfortunately, unlike a decade ago, the Thai rural sector presently has much less ability to absorb back laid-off workers from factories. Moreover, the price of agricultural produces has collapsed by around 21% compared to the previous years.

Rural households have also accumulated larger amounts of debt due mainly to the rising costs of inputs. The government continues to finance price support schemes to reduce the pressure on the agriculture sector. Still, since the money stays in farmers’ hands for only a very short period of time before being transferred to landlords, chemical companies and local money lenders.

Without addressing structural problems in the sector, such schemes will hardly lead to an improvement in the quality of life of small rural producers.

Thailand's current Democrat-led government came up with its first stimulus package only days after taking office, by approving a 1.15 trillion baht ($3.5 billion) supplementary spending budget for 2009. This amount accounted for approximately 1.4% of GDP.

With the substantial decrease in government revenue due to current economic conditions, the package will force the government to run a 3.6% budget deficit, including seeking financial support from countries like Japan and China. Thailand will also need help from international financial institutions such as the World Bank and the Asian Development Bank.

The spending bill will finance 18 separate projects with the main objectives of helping finance new jobs and giving a boost to the flagging economy. According the Minister of Finance, the government’s approach is to “put money back in the hands of the public, rather than keep it in the hands of the government.”

As part of its stimulus package, the government will finance a 2,000 baht ($56) grant per head pay increase for over 8 million employees and 1.5 million civil servants earning less than 15,000 baht ($423) per month. Also, it will provide a six-month extension of the subsidy program offering free water and electricity for low-income households as well as free bus and train rides for commuters.

The largest single item in the budget is education, with 19 billion baht ($540 million) set aside to finance 15 years of free schooling. Shortly after the first announcement of the package, the government supplemented it with an additional budget of nearly 30 billion baht to support local small and medium size enterprises and export industries.

It is impossible to truly evaluate the effectiveness of the stimulus measures employed by the current government at this point since most of the projects will be implemented only by April 2009.

The country’s leading economists have criticized the package as inappropriate. The government says that the package was well-balanced, with special attention to the low-income group of people. One of its main goals is to quickly raise domestic consumption spending in the second quarter in order to compensate for the drop in external demand, and prevent the economy to go into a coma.

At the same time, the government is determined to deepen the overall emphasis on export promotion. For example, Thailand took the key role in speeding up free trade agreement (FTA) deals including the ASEAN-Australia-New Zealand trade agreement inked in the beach resort town of Hua

Hin just weeks ago. It also stated that the problematic Alien Business Act will not be amended in way that might upset foreign investors.
This law, enacted in 1999, limited foreign ownership of certain Thai industries. However, the law did not prohibit foreigners from being the majority in the board of directors, and also did not prohibit having different classes of shares with differing voting rights.

This loophole allowed thousands of foreign-controlled businesses to operate in Thailand. Since 2006, there was an attempt to adjust the definition of "Alien" in this act in order to eliminate the existing loophole. Still, this has yet to occur.

The government also sent the prominent Deputy Commerce Minister to the United States in an attempt to recommence the U.S-Thai FTA negotiation, which was shelved more than three years ago.

This one-sided strategy by the Democrat-led government might lead the country into further trouble if the global crisis goes on. At best, it will diminish the ability of the country to mitigate similar economic turbulence in the future.

Although the government has asserted the idea of introducing property and inheritance tax as part of the country’s tax reform, it remains to be seen whether it is a genuine endeavor — or simply a tactical political maneuver.

Moreover, while the government is considering stimulating the economy by investing in alternative energy and green development, no details have been given so far.

A paradigm shift toward a more inclusive, broad-based approach to economic management never comes about easily. In fact, it is probably impossible during normal times.

But we are in a time of crisis, a time when genuine change could be closer than anticipated.