Tuesday, July 5, 2011

Are the banks urging Thailand to drink the Kool-Aid?

Somebody call a physician.  Economists at some of Asia's leading financial institutions are suffering amnesia.  Or worse.

First, some background.  For a long time, economists have been urging leaders of emerging countries in Asia to shift from export-led growth strategies to domestic investment.  They have preached spending on infrastructure and the stimulation of local demand.  Here's an article dated May 2009:
ASEAN: ADB urges Asia to increase domestic spending

The Asian Development Bank (ADB) President Haruhiko Kuroda told ASEAN, East Asian and South Asian officials at the ADB’s annual meeting in Bali, Indonesia that Asia must boost domestic consumption and end its dependence on exports as external demand plunges in the world economic slump....

Although Asian governments have embarked on economic stimulus packages, Kuroda said such measures would not be enough without structural reform to end the region's dependency on demand from rich countries.

Over the longer term, developing Asia is starting the process of rebalancing growth from excessive dependence on external demand to greater resilience on both consumption and investment," he said.
What was good advice in 2009 ought to be good advice in 2011.   This year, nobody expects consumer demand in the US or Europe--regions plagued by unemployment--to rebound anytime soon.  The insatiable appetite of Western leaders for draconian fiscal austerity is reducing consumer demand, and may push the world's richest economies back into recession soon.  Thus, if Asian economies are to prosper, their leaders have never had more reason to focus on stimulating local demand.

Or so one would think.  Today the Wall Street Journal reports that the Bank of Thailand and various international banks are warning that if the incoming government of Yingluck Shinawatra follows through on its plans to increase domestic spending, this will have harmful consequences.  They are sounding alarm bells about a rise in Thailand's national debt and an increase in the rate of inflation:
New Populist Policies Could Harm Thai Economy
BANGKOK—A sweeping electoral victory for Yingluck Shinawatra has allowed Thailand to avoid the immediate risk of social unrest or military intervention, but the incoming government's populist policies may threaten the vibrancy of Southeast Asia's second-largest economy.

The sister of exiled former Prime Minister Thaksin Shinawatra wooed voters not only with her charisma, but with an array of vote-grabbing promises: an increase of 36%-89% in the minimum wage, guaranteed rice prices for farmers, starting salaries of at least 15,000 baht ($492) for university graduates, tablet PCs for students, and high-speed trains across the country.

"Even if they only deliver a fraction of what they promise (on wages), the impact will be significant" on inflation, said Santitarn Sathirathai, an economist with Credit Suisse in Singapore.

A few days before the election—with both parties promising to raise the minimum wage—Mr. Santitarn raised his average inflation target for 2012 to 3.7% from 3.5%.

The way the government implements any minimum-wage increase will be crucial: An across-the-board increase "will be very inflationary," Mr. Santitarn said, but a varied introduction across sectors would limit the impact on inflation, which rose 4.06% in June from a year earlier.

The Bank of Thailand has warned that inflation poses the biggest threat to economic growth this year. Gov. Prasarn Trairatvorakul said during the election campaign that the next government needs to maintain fiscal discipline and that increasing the budget deficit could threaten fiscal stability.

Standard Chartered Bank wrote in a research note that the For Thais party had indicated its economic policies would cost around 1.85 trillion baht over the next five years, a level of spending that could push back plans to achieve a balanced budget by two years, to fiscal 2018.

Although Thailand's public debt of about 45% of GDP "is not yet at alarming levels, the big-ticket investment could imply larger demand for public borrowing over the coming years than markets had expected," Standard Chartered said.

Despite the calls for fiscal discipline, the new government will face enormous pressure to make good on its promises...
Let's hope that Thailand's new government ignores the fear-mongering of international bankers and the Bank of Thailand governor.  Even a substantial increase in a national debt that, as a percentage of GDP, is only half that of the United States, will not spell ruin for Thailand.  Moreover, modest inflation can discourage hoarding and stimulate productive investment. 

Thailand may well be on the verge of pursuing an economic growth strategy that would not only be advantageous for poor and middle class Thais, but good for the world economy.  Thailand might set an example for other countries.

I would tend to chalk up the Wall Street Journal article as a reflection of the present global hysteria for "fiscal discipline now at any price." This economic dogma has been demonstrated to serve bond-holders at the expense of workers.

Incidentally, I found another version of the comments made by Gov. Prasarn Trairatvorakul, cited above, at MSNBC:
Thailand risks slipping into a fiscal crisis as in Western economies, eroding consumer power if the new government substantially expands fiscal spending as many parties are promising, warns Bank of Thailand governor Prasarn Trairatvorakul.
If Gov. Trairatvorakul actually believes that Western economies are suffering from "a fiscal crisis" as opposed to crisis of consumer demand and unemployment, then we can be quite certain he's drinking the Kool-Aid.   

No comments:

Post a Comment

Because all comments on this blog are moderated, there will be some delay before your comment is approved.