Elements of Thaksinomics
Like Reaganomics in the 1980s, Thaksinomics is controversial. It is an eclectic
strategy that combines the traditional element of the EAEM model, emphasizing
mass manufacturing spearheaded by foreign direct investmentdubbed the
First Trackand a more domestic focus on local enterprises leveraging
indigenous skills and resources, known as the Second Track. A distinctive
feature of Thaksinomics is the emphasis given the Second Track.
As in the past, the First Track is oriented towards creating relatively
high paying jobs and earning foreign exchange. The Second Track on the other
hand focuses on activities that will not come into direct competition with
China. A major goal of Thaksinomics is to pursue both goals in a manner that
gradually shifts the Thai economy from export dependence to greater reliance
on the more controllable domestic market. Thaksin envisions this process increasing
domestic consumption to 60% of Gross Domestic Product (GDP) from the current
level of 55%. Simultaneously the goal is to reduce exports as a proportion
of GDP from 60% to 50%.
The rationale for the two track strategy is straightforward: most developed
countries have a smaller proportion of exports to GDP than do the East Asian
economies. Therefore, they are less vulnerable to external shocks like the
terrorism incident in Bali, the SARS epidemic, or a slowdown of the U.S. economy.
The idea is to stimulate domestic demand in the short run through increased
government expenditures, while simultaneously searching for new local industries
to develop as part of the diversification away from EAEM activities. At the
same time, domestic market focused policies can achieve structural change
by assisting business in moving up the value added chain, thus keeping ahead
of direct Chinese competition.
While it might appear that Thaksinomics represents a retreat from globalization,
this is not the case. Although the policies are more domestically focused,
they are not meant to discriminate against foreign capital. In fact Thailand
is still aggressively attempting to attract foreign direct investment (FDI).
Implementation 1st Stage
Implementation of Thaksinomics has evolved through various stages. One of
the key elements in Thaksinomics is the focus on poverty alleviation, especially
in rural areas. Initial policies were geared toward providing small fiscal
doses aimed at reviving rural demand and creating housing demand for low-wage
government workers, rejuvenating underdeveloped resources and indigenous skill-rich
small and medium sized enterprises (SMEs) with good growth potential. Another
key element was assisting under-leveraged households to achieve higher levels
of consumption. Implementation has occurred through a variety of unique projects.
The most urgent policies that the Thaksin government initially implemented
were those aimed at empowering the grassroots.
The first programs were focused on the agricultural sector, starting with
a three-year moratorium on farmers' debt payments to the Bank for Agriculture
and Agricultural Cooperatives (BBAC). This was the initial step in reforming
the debt structure and maturity profile of the agricultural sector to match
the crop production cycle. At the same time, the government is attempting
to upgrade land rights to be used as bank collateral.
The urban poor also benefit from incentives brought about by the government.
Small loans for street-side vendors are provided through the Government Savings
Bank (GSB).The GSB provided individuals loans worth 30,000 baht each for a
total of 10 billion baht in 2002.
Retired Civil Servants
A special spending package was also set up for retired civil servants. Under
this program the government will pay an amount equivalent to 30 times salary
to the families of civil servants who pass away. A new ruling permits retired
civil servants to spend half of that amount before their death. It is estimated
that the total amount of spending power created from this initiative would
be roughly 45 billion baht.
To boost grassroots access to financing, the Thaksin administration set up
a number of new institutions:
The Village Fund
The first was the Village and Urban Revolving Fund. To many, Dr. Thaksin's
election campaign pledge to provide 1 million baht ($24,000) to each of Thailand's
70,000 villages was a populist handout. It's actually a revolving loan program.
The program is unique in that it specifically targets projects aimed at stimulating
the rural economy. Village leaders and bankers will identify projects and
provide loans at 4% interest (commercial farm loans cost 5%-8%) to be guaranteed
by community groups. The intent of the $1.6 billion Fund is to enable farmers
to increase productivity, and value added, through developing new activities
such as processing and packaging. The Fund can also be drawn on by individuals,
households or groups to start their own small or micro-enterprises.
The People's Bank
This newly created bank is another grassroots credit facility set up to
provide credit to micro-enterprises. In addition to providing financing to
groups without access to the formal banking system, the goal of the Bank is
also to promote entrepreneurship among the poor and the small traditional
producers in villages.
The Bank for Small- and Medium-Sized Enterprises (SMEs)
SMEs play a critical role in Thaksinomics and the Bank for Small-and Medium
Sized Enterprises is the financial component of the Government's overall SME
promotion program. SMEs account for 40-50 percent of the Thai economy's GDP,
38 percent of the total value of exports and 69 percent of the country's jobs.
Thaksinomics singles out SMEs because of their potential to adjust to fast
changing conditions, to reach certain market niches more rapidly than bigger
companies and to innovate in terms of products and process.
One Tambon Project
This program is nationwide, covering nearly all of Thailand's 7,252 districts.
One Tambon is predicated on the idea that every Thai tambon (sub-district)
has a variety of specialized local products. The key assumption of the project
is that each community has a comparative advantage in one or more of these
traditional products. The project's role is to assist the communities in modernizing
the production and distribution process of these products so that they can
be competitive at the national and international levels. The government's
role is to identify candidate products and then to assist their development
through providing necessary support for their eventual success.
The program is clearly intended to find new niches in foreign markets and
develop new winners that will provide an alternative to the foreign direct
investment-based and mass produced exports products that the country has been
fast losing to China and other countries in the region with cheaper labor.
Other programs introduced during this period include:
- Housing projects for state workers and the low income masses introduced
in 2001 and 2002, respectively;
- Various small and medium sized enterprise (SME) development initiatives
introduced since 2001; and
- The comprehensive State-Enterprise Privatization Program started in 2001.
Clearly, it is a bit early to critically evaluate these initial attempts.
However it is safe to say that these programs, along with some of the government's
other fiscal activities have contributed to terminating asset deflation, reviving
domestic demand and bringing about positive asset demand and asset price expectations.
In addition there are some encouraging results stemming from the One Tambon
project. Government figures put total sales of village enterprises under the
program at $558 million in 2002, with an average profit margin of 26 percent.
Their products are also finding their way to the shelves of luxury shops in
Japan, the United States and Europe, thus enabling the village producers to
earn four or five times more on each item than when sold in the local market.
Implementation 2nd Stage
The second stage of Thaksinomics is intended to build on the first. In large
part this is a more innovative albeit controversial stage.
The Capital Creation Scheme
Tentatively scheduled to start in December 2003, the Thai government plans
on introducing a new program to redefine or reclassify assets so that they
carry the underlying legal rights or documentation necessary for collateralized
bank loans. The program has an ambitious agenda including the reclassification
of land assets, intellectual-property assets, machinery assets, public pavement
and stalls assets and rental-right assets. The basic idea is to legalize different
assets so that the owners can use them fully to get access to capital. This
should be a particular benefit to poor or low income earners.
The basic idea underlying this program is not new, but instead one that has
been advocated for years by Peruvian economist Hernando de Soto.
What de Soto has found is that most people in the developing nations hold
defective forms of assets such as proprieties and stalls that lack the documentation
or legal status that give them access to capital. Because the right to these
possessions is not adequately documented, these assets cannot readily be turned
into capital, cannot be traded outside the narrow local circles where people
know and trust each other, and cannot be used for collateral for a loan. Apparently,
the government aims to have the state-owned banks make available some 200
billion baht to support the next wave of loans arising from this asset-reclassification
The question is whether this program will further help low income people
or saddle them with more debt; and whether the program will have adverse financial
consequences to the country in the long term. Will it jump start a large segment
of the economy, formerly marginalized, or will it simply create a new round
of non performing loans? If de Soto's examples from Peru and other countries
are any indication, the project should be highly successful.
By one estimate the Capital Creation Scheme
in the next 6-7 years could convert at least US$10 billion of dead capital
into pledgible capital and transfer US$10-15 billion worth of underground
economy activities into the real economy.
Grand Project Schemes
In a break from grassroots-type projects and programs, the Thai government
has been proposing a number of grand projects designed to create new regional
centers of economic activity:
- In January 2003 for example Thaksin announced a 28 billion baht ($650
million) plan to make the northern city of Chaing Mai an international aviation
hub. The initiative aims to upgrade airport facilities and capacity to promote
Chiang Mai as an alternative site to Bangkok for foreign trade and investment.
- Also in January 2003 Thaksin unveiled a 100 billion baht plan to transform
the resort island of Pyhuket into a laboratory for high-tech research and
development. The software industry is one of several export businesses the
authorities hope will be centered here.
- In another major initiative, the government has recently resurrected centuries-old
plans for cutting a canal through Thailand to shorten shipping routes between
Europe and East Asia. The proposed project, including construction of two
harbors, a monorail and a highway across the Isthmus of Kra would cost around
While EAEM model cannot serve as the sole basis for future growth, it's not
clear that massive expenditures of this nature will necessarily come up with
new services in which the country has a clear comparative advantage.
The Vayupak Mutual Fund Initiative
While the Capital Creation Scheme is aimed chiefly at reviving dead capital
in the rural sector, a complementary new initiative, the Vayupak (named after
a mythical bird that sometimes lays a golden eggbut other legends depict
the avian creature as half-demon ) introduced
late in 2003 is focused on monetizing the dead capital held by the government.
Estimates are that this initiative has the potential
to mobilize an additional several billion $US worth of excess liquidity from
the banking system. In all, it could add US$7-8 billion or an additional 10%
of the market capitalization of Thailand.