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.[20] 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 scheme.[21]

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[22] 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.