Origins of Thaksinomics
To its defenders Thaksinomics is a pragmatic
response to the void created by the demise of
two key paradigms that formed the basis of much of the pre-1997 economic policy
making in East Asiathe Washington Consensus, to a certain extent a set
of policies imposed from outside the region; and the East Asia Economic Model
(EAEM). A somewhat related factor, the observed decline in productivity in
the 1990s, no doubt also played a significant role in the development of Thaksinomics.
Demise of The Washington Consensus
Before the Asia crisis in 1997, most technocrats and businessmen in Thailand
believed that the country's economy should be relatively open. This openness
provides access to technology and capital. Technocrats have long believed
that increasing openness is needed to force Thai companies to become more
efficient and to break down old monopolies. Hence liberalization and privatization
had been staples of economic policy since the mid-1980s.
The 1997 Asian crisis brought this view into question, along with a number
of related conventional wisdoms of the time, the most notable being the so-called
Washington Consensus, an agreement of outlook among the multilateral agencies
in Washingtonthe World Bank and the International Monetary Fund (IMF)on
a set of free market policies that formed the basis for the conditions under
which those agencies lent to developing countries.
Under the Consensus, countries were encouraged to promote liberalization
by reducing barriers against imports with a view to eventually achieving free
trade. Privatization of state owned enterprises and financial deregulation
were also key elements in Washington Consensus policies. In short, governments
were expected to withdraw from economic activity and intervene as little as
possible. Free market prices were seen as the most important factor in promoting
In the 1990s these policies began to be questioned, not only by academic
writers but also by the World Bank itself. The double-digit annual Gross Domestic
Product (GDP) growth in China since the start of its economic reform program
in 1978 has not been achieved by universal free markets, free trade or widespread
privatizations. The Chinese experience suggested that the state can promote
development by intervention in the economy. Looking back on the Asian Crisis
it is also apparent that its cause was not the result of too much government
intervention, but of too littlea failure to regulate financial markets.
Pasuk and Baker's analysis of the 1997 Thai
crisis goes even further, arguing that the transformation of Thai institutional
structures to conform to the mandates of the Washington Consensus on limited
state economic intervention are precisely what caused the crisis.
Increasingly, throughout Asia a post-Washington Consensus outlook is emerging
which stresses that markets can failespecially financial markets and
markets for technology and that governments should intervene to promote
domestic competition, regulate financial transactions, promote education and
stimulate the inward transfer of technology.
This particular view of government intervention has become one of the key
elements of Thaksinomics.
Limitations of the East Asia Economic Model (EAEM)
As its name suggests, the EAEM is a development strategy somewhat unique
to Asia. The strategy is built around two key features: (a) high investment
rates stemming mainly from foreign direct investment (FDI), and (b) an outward
orientation emphasizing labor intensive manufactured exports. Multinational
corporations often play a dominant role in both aspectssupplying FDI
and mass producing goods for the export market. In practice, it is the development
model followed by the majority of Asia/Pacific countries, including Thailand,
since the late 1970s and early 1980s.
Imbalances created over time by the implementation of the EAEM have undermined
its effectiveness in generating high and sustained rates of growth. For example,
Lian notes that the common pattern is for the
Asia/Pacific region's terms of trade to worsen nearly every time global demand
for electronics, agricultural products or primary commodities declines sharply.
[The] Asia/Pacific region's pursuit of the EAEM directly contributes to
global imbalances and negatively affects the performance of Asian companies
as well as the standard of living of the region's workers and households.
The logic is simple, in our view: excess saving exacerbates the global savings
imbalance that in turn necessitates imbalances in trade; in turn the nature
of trade and production subjects the region to a vicious cycle of price
wars and worsening terms of trade.
Breaking this vicious cycle of price wars is another key component of Thaksinomics.
Here it should also be noted that even in the hey-day of the EAEM, Thailand's
openness relative to other countries, while
high, began declining in the early 1990s, suggesting that the EAEM model was encountering diminishing returns
in terms of integrating the country into the world economy.
It is also not clear that the EAEM model was enabling Thailand to utilize
its resources in the most efficient manner. In his analysis, Porter
found a strong relationship between his Microeconomic Competitiveness Index
(MCI) and per capita income, with over 81 percent of the differences in country
per capita incomes accounted for by the index. However, Thailand's per capita
income is considerably lower than one would anticipate, given the country's
MCI. In this sense the Thai economy was clearly underperforming in the early
2000 period. Korea, Malaysia, China and Indonesia also fell in the under performer
group, while, given their MCI scores, Singapore and Taiwan's per capita incomes
were in line with what one might expect. Hong Kong was the only country in
the region classified as an over-achieverincapable of sustaining its
per capita income with no improvement in its microeconomic fundamentals.
Adverse Trends in Total Factor Productivity
In part, the increasing limitations on growth imposed by the EAEM manifest
themselves in the observed trends in the country's total factor productivity
(TFP). TFP measures the efficiency of a given set of input factors, capital
and labor in generating output. Alternatively it can be thought of as the
level of technological development in the economy a given amount of
factor input will generate more or less output depending on the country's
technological capacity. TFP is a critical variable for sustaining long-term
growth because unlike increments of capital and labor it is not subject to
In its assessment of the trends of TFP in Thailand, the IMF
found that the high rates of growth in the pre-1997 period were driven by
capital accumulation, rather than TFP growth. Even more significantly, IMF
estimates show that TFP growth slowed during the 1990s. This finding is similar
to that of other researchers.
These patterns no doubt account for the fact that in terms of the overall
competitiveness of its products, Thailand lags behind several of its East
Asian competitors: Singapore, Hong Kong, Taiwan, Korea and Malaysia, with
China quickly closing the gap. It should be noted that Thailand did improve its competitiveness during
the first two years (2001-02) of the Thaksin administration.
Given likely demographic and investment patterns in the country, the IMF
concluded that medium-term economic growth in Thailand will have to be driven
by TFP growth rather than accumulation of capital and labor. This shift in
the country's growth mechanism represents a sharp contrast with the pre-1997
growth pattern driven largely by capital accumulation.
The need for TFP-led output growth underscores the importance of maintaining
an environment that is conducive to efficiency gains and technological development.
It is in this light that Thaksinomics will be examined belowis this
new approach to development in Thailand likely to succeed in creating the
necessary conditions for expanded productivity and growth?