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.