Origins of Thaksinomics

To its defenders[9] Thaksinomics is a pragmatic response[10] 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 Asia—the 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.[11]

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 Washington—the 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 successful development.

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 little—a failure to regulate financial markets. Pasuk and Baker's[12] 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 fail—especially 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.[13] 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 aspects—supplying 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[14] 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.[15]

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[16] 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[17] 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-achiever—incapable 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 diminishing returns.

In its assessment of the trends of TFP in Thailand, the IMF[18] 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 below—is this new approach to development in Thailand likely to succeed in creating the necessary conditions for expanded productivity and growth?