Thailand 10 years after the crisis Beyond finance

Thailand 10 years after the crisis: Beyond finance, the exhaustion of a low-productivity growth regime? Bruno Jetin, Research Institute for Development (IRD, France) and Center for Education and Labour Studies (CELS, Chiang Mai University, Thailand).

Since the crisis, ASEAN countries have entered a period of slow growth.

INVESTMENT HAS NOT RECOVERED

A GROWTH PULLED BY EXPORTS

Thailand is no exception 45. 0 Private and Public investment rate in Thailand 40. 0 35. 0 30. 0 25. 0 20. 0 15. 0 10. 0 5. 0 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 r 20 04 r 20 05 p 20 06 20 07 -1 0. 0 Source: computed by the author from NESDB Private Public Gross Fixed capital formation

Even if private investment in equipment has slowly improved. 40. 0 Private investment as a share of GDP, 1988 prices 35. 0 30. 0 25. 0 20. 0 15. 0 10. 0 5. 0 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 r 20 04 r 20 05 p 20 06 20 07 -1 0. 0 Source: computed by the author from NESDB Construction Private Equipment Private TOTAL PRIVATE

Has Thailand entered a new period of slow-growth? Source: R. P. Mallikamas, D. Rodpengsangkaha, Y. Thaicharoen (2003, p 3).

Analysing structural change • Finance is powerful. But finance does not create value. The financial sphere is more autonomous, but not independant from the productive sphere. • Understanding structural change in the productive sphere and in society is necessary to better understand the power of finance.

Employment: Agriculture is no more dominant. 80. 0 Structure of employment in Thailand, 1980 -2006 70. 0 60. 0 50. 0 40. 0 30. 0 20. 0 10. 0 2006 2005 2004 2003 2002 2001 Manufacturing 2000 1999 1998 1997 1996 Non-Agriculture 1995 1994 1993 1992 1991 Agriculture 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 0. 0

Formal and informal labour income are on a par. 60. 0 55. 0 Share of formal labour income and informal labour income in % of GDP 50. 0 45. 0 40. 0 35. 0 30. 0 25. 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Calculated by the author based on NESDB nad NSO data Raw labour share Share of income from unincorporated Entreprises

The labour income share is decreasing in favour of the capital income share Labour and Capital shares of GDP in Thailand, 1980 -2005. Source: calculated by the author based on NESDB and NSO 0. 90 0. 80 0. 70 0. 60 0. 50 0. 40 0. 30 0. 20 Adjusted labour share Adjusted Capital share Linear(Adjusted labour share) Linear(Adjusted Capital share) 5 p 20 04 20 03 20 02 20 01 20 00 19 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 90 19 89 19 88 19 87 19 86 19 85 19 84 19 83 19 82 19 81 19 80 0. 10

The rate of accumulation of capital was decreasing since 1990 and profit started to decrease in 1996. Profit rate, GDP growth , capital stock growth 13. 0 11. 0 9. 0 7. 0 5. 0 3. 0 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 0 20 4 05 p -1. 0 -3. 0 -5. 0 -7. 0 -9. 0 -11. 0 Source. Calculations based on NSO data Profit rate (constant 1988 prices) in % Growth rate of capital stock in % Real GDP Growth rate 1988 Prices in %

Capital productivity was decreasing since 1989 and fell in 1995 -1996. Capital productivity and real growth 0. 40 15. 0 0. 38 10. 0 0. 36 0. 34 5. 0 0. 32 0. 30 0. 28 -5. 0 0. 26 0. 24 -10. 0 0. 22 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 0 20 4 05 p 82 19 19 81 -15. 0 80 0. 20 Capital productivity Real GDP Growth rate 1988 Prices in %

Unit labour cost is rising

And competitiveness is eroding

Conclusion regarding the production sphere • The slow productivity-growth regime is not sustainable. • Wage repression is not enough to restore competitiveness. • Thailand must go beyond the assembly stage but how without industrial policy and protectionism? • Incentive is not enough: Automobile versus electronics.

The surplus in manufactured products: Structural?

The financial sphere: back to 1997? • Finance makes thing worse. Capital inflows and the present speculation on the baht is aggravating the decline in competitiveness due to rising unit labour cost. • There are several common points between the present situation and the 1996 -97 crisis. • But there also important differences.

Mobility of capital is higher than ever

And so is financial volatility

Capital inflows are clearly speculative. • At the Bangkok stock exchange (SET), foreign capital invest in banks, energy and real estate. • They don’t invest a lot in manufacturing and agriculture. • There is still room for the buble. Price-toearning of 11 -12 times in the SET is still cheap compared with the 15 times valuation in Singapore market and higher valuation in Indonesia.

But there also differences • Former « crisis countries » have current account surpluses, not deficit. Forecast for 2007 are 11% in Malaysia, (9% in China), between 1 and 2% for Thailand, Indonesia and Korea (IMF, ADB). • Central banks are not commited to defend a fixed peg. • There is no downward pressure on forex but upward pressure.

Asian governments have not drawned the good lessons • Based on the fact that Asian savings were far more higher than capital outflows in 1997, they have decided to promote « Asian bond markets » . (see ABMF 1 and ABMF 2 managed by the ADB and BIS). • The (good) idea is that Asian savings should stay in Asia as a shield against massive financial outflows. • It is inspired by the European experience of regional integration. • The project is flawed by the fact that there is no serious institutional and monetary integration.

A project bound to fail • No serious project of creating an « East-Asian monetary Unit » like the ECU before the euro, no serious project of creating an « East-Asian monetary system » . • European experience shows that Financial integration without monetary integration is bound to fail.

Conclusion • Instead of a regional financial integration there will be a direct integration in global markets which are far more efficient and competitive. • As a consequence, Asian countries will be even more exposed to the whim of financial markets. • The project in fact is to operate a shift from a bank-based system to a market based system in Asia that better suit global finance.

My proposal. • Collective and coordinated capital controls at the regional level to support an « Asian monetary System » . • This « Asian monetary system » would manage the float of an « Asian Currency Unit » (ACU). Band of fluctuations protected by Currency transaction tax and other capital controls. • Governments could raise bonds denominated in « ACU » to finance long-term investment in infrastructure.