This article is not meant to diminish the brilliance of the spiritual leader of the Pheu Thai Party, former prime minister Thaksin Shinawatra. It is to demonstrate that, despite his immense knowledge and vast experience, Thailand's current economic problems are caused by structural deficiencies and cannot be resolved by traditional stimulus measures. One needs a good understanding of economic principles to approach the problems correctly.
This article serves as the opening of a three-part article, the three parts being (1) problems with Thaksin's vision, (2) the zombie Thai banking system, and (3) the need for a paradigm shift.
Thaksin's vision shows that, even as experienced as he is, he has misjudged the changing big picture of the Thai economy and seems to rely on traditional solutions. The reliance on a traditional model of fiscal and monetary stimuli has seen government after government fail to push the Thai economy forward, resulting in lower growth rates than our peers. Thai Q2 2024 GDP growth of 2.3% (already a pumped-up figure) is lower than the 2.9% of Singapore, not to mention the 6.3% growth in the same quarter in the Philippines.
If one may describe an economy as having "upstream, midstream and downstream" models, the banking system is the upstream of an economy as it provides necessary liquidity to the entire economy. The production sector is the midstream and consumption sector is the downstream. Banks provide money, factories produce, and consumers consume. If the flow is smooth, an economy should grow healthily. Economics is not at all complicated.
In Thailand today, we have big problems with the upstream. Pivate credit contracted for the first time in two decades in Q2 2024 with a contraction of 31 billion baht. In the month of July, the contraction doubled to 62 billion baht. No wonder the midstream and downstream are in a shambles. The zombie Thai banking system will be analysed in the next article.
The final article of the series -- need for a paradigm shift -- is a critical one. The article will show that the Thai economy is in "diminishing returns to scale" mode and no fiscal or monetary stimulus policy will be effective in pushing the economy up. Therefore, tools like the digital wallet scheme will not be worth it.
On Aug 22, Thaksin gave a talk on the topic "Vision for Thailand". Undoubtedly, it was a much-anticipated event as everybody wanted to hear his ideas on how to resolve Thailand's current economic slump. According to an article in the Bangkok Post dated Aug 23, there were 15 key visions.
To me, what Thaksin did not say is equally important to what he did say. In his vision, he did not mention two important game-changing projects -- the Land Bridge and the Eastern Economic Corridor (EEC).
The EEC is the flagship project of former prime minister Prayut Chan-o-cha's Thailand 4.0 vision. The project cost was US$47 billion (1.6 trillion baht) and was designed to propel Thailand towards high-tech industry like Malaysia. The project is half-done. Now, it is probably half-dead.
Former PM Srettha Thavisin's landmark Land Bridge project, which aims to establish Thailand as a marine transportation hub, was also not mentioned. Why? Isn't this a Pheu Thai Party project?
These two missing megaprojects are evidence that Thailand does not have a firm development strategy. Whatever projects the government is supporting could be completely ignored by the next one.
I will not revisit the digital wallet as I have written about it too many times. I remember I wrote that, owing to funding difficulties, the scheme could be reduced to cash distribution to welfare card holders. Even though the government still insists it will later extend the handout to full coverage, the issue of "finding the money" is still valid.
I do not think Thaksin is in full agreement with this scheme due to its legal and funding risks. He is too smart for that. But a campaign promise is a campaign promise.
Thaksin seems to misunderstand the issue of the impact on GDP on legalising underground economic activities. According to information given in his talk, the underground economy is estimated to be 50% of GDP or about 9 trillion baht. Once legalised, Thai GDP will expand accordingly. That is incorrect.
As long as the underground economy uses Thai baht for transactions, underground activities are already fully accounted for in the current GDP. Legalising them would add nothing to the size of the GDP. Let me give two examples of a security guard at an illegal gambling den and the owner of an illegal gambling website.
The security guard gets paid 20,000 baht a month with gambling money. He then uses that salary to pay rent, utility bills, transportation costs, meals, etc. His 20,000 baht paid from an illegal source would then be recorded properly in GDP accounts.
An online gambling boss earns 20 million baht in profit. He then deposits that money in banks, which use his deposits to issue a loan to a normal business to build a factory. His illegal 20 million baht would then become legal and gets recorded in GDP as private investment. Legalising online gambling would not boost GDP.
This is my own observation. The underground economy launders its illegal money through informal loans. Depositing too much money in banks could pose the risk of being reported to authorities. The total amount of informal loans outstanding is about 450 billion baht. Who in Thailand has that amount of money to finance such large operations, except bosses in the underworld?
A gambling tax is a different issue. Does the government really want tax income from gambling?
His most interesting view is household debt restructuring and haircuts. Great idea and it should be implemented. The question is: who would bear the cost of the haircuts? Outstanding household debt is 16 trillion baht. If there should be a 20% haircut, the cost would be 3.2 trillion baht. Thaksin suggests halving the Financial Institutions Development Fund (FIDF) contribution fee from 0.46% to 0.23%.
Unfortunately, he was incorrectly informed that the fee is 1 trillion baht per year. Therefore, such a fee would pay off the haircut cost in about six years. The fact is that banks' annual contributions to FIDF are only 60 billion baht, not 1 trillion baht. Halving the amount would pay off the haircut cost in 106.7 years.
This is a nice idea, but haircut loss management must be more realistic.
Entertainment complex? Investors better make sure that the complex is up and running while this current government is still in office. The next government might not support the project, just as this government gives no importance to the EEC or Land Bridge schemes.
His other visions are not so hot as we have heard them before like industrial restructuring, bureaucratic reform, a financial hub, enhancing tourism potential. All nice, but nothing mind-boggling.
Thaksin's visions are to be commended. However, they missed the bull's eye of Thailand's economic problems. See my next two articles, and readers will understand why I say that.
Chartchai Parasuk, PhD, is a freelance economist.