Next hurdle is for economy to run its course

Thanong Khanthong The Nation Bangkok

Thanks to Prime Minister Thaksin Shinawatra, Thailand has moved from a liberal, free-market economy to a command economy. This is what a recent front-cover story of Newsweek has suggested. Indeed, Thailand is now pursuing popular capitalism through heavy-handed government intervention and easy credit.

A Chulalongkorn University economics lecturer believes that the growth potential of the Thai economy is 5 to 6 per cent. Any further growth rate on top of that, he says, represents intervention by the government either through the budget or off the budget.

Last year the Thaksin government succeeded in managing the economy so that it grew more than 6 per cent. This year, the prime minister has said, he plans to manage the economy to grow 7-8 per cent. Next year he will try for 10 per cent.

Through easy credit and popular capitalism, in which state money is directly or indirectly pumped into the pockets of rural Thais, the Thaksin government so far has injected almost Bt300 billion into the economy. That is the government's figure. The opposition Democrats believe it is significantly higher at around Bt700 billion. However, the credit rating companies such as Moody's Investors Service and Standard & Poor's believe the government's popular spending is manageable.

Populist sentiment is also running high in the stock market. The government has set a target to grow the stock market. It wants the SET index to reach 1,000 this year. It also wants the size of the stock market to equal the country's gross domestic product. Government tools, such as the Government Pension Fund, are being used to boost the stock market, while state enterprises are being pushed into it. Now the market capitalization of the stock market is about Bt4.8 trillion. If the Electricity Generating Authority of Thailand and other state enterprises go public this year along with some 70 private companies, the market capitalization would exceed the country's GDP.

Investors, politicians and state enterprise executives are feasting well on this stock market populism.

The Bank of Thailand is also adopting a managed float exchange rate system. Without intervention the baht would have surged to Bt35-Bt36 to the US dollar. This is one of the areas that the government is doing it right by allowing the central bank to keep the baht relatively weak at Bt39. But any time the prime minister talks up the baht to show off Thailand's economic might, MR Pridiyathorn Devakula, the central bank governor, has a tough time battling foreign exchange markets.

Then Thaksinomics, strictly defined as government spending and easy credit, would be spending Bt1 trillion over the next five years to build roads, rail lines and the mass transit system in Thailand. This massive amount of government spending would be a key to keeping economic growth humming, even in the event of external crises. In the aftermath of the 1997-1998 economic crisis, it is right for the government to take charge by keeping the baht weak to boost the export sector, pumping up the economy through fiscal stimulus and easy credit and modernizing the country's infrastructure. For this is the only way to unlock the liquidity trap, in which some Bt600 billion was kept idle in the financial system due to bad debts and to the weak economy.

But the way the Thaksin government uses the balance sheet of the public sector to mobilize a turnaround of the economy looks like what the Soviet Union did in the past. You have to go back to read Paul Krugman's article called the "Myth of the Asian Miracle". Through massive mobilization of labor and capital, the Asian economy, like the Soviet Union's economy of the past, has grown sharply.

But somewhere along the way this high growth cannot be sustained once labor and resources are used up. It is then that a crisis happens. The only way to sustain growth is through productivity growth and a better-educated workforce.

Thaksinomics has passed its first hurdle rather successfully by creating high economic growth and rebuilding confidence. The next hurdle will come after the government steps aside to let the economy run its course. Then growth will be measured by productivity growth and by innovation rather than by government input.

But it appears that government intervention in the economy is not likely to subside in the near future, hence creating a risk of the country repeating the mistake of the old economic model.