Monday, 14 February 2005

Thailand under Thaksin

Incumbent prime minister Thaksin Shinawatra won Thailand's national elections on 6 February, ensuring that his policies will continue.

Some observers are optimistic that Thailand will thrive under Thaksin. For example, in a commentary for, Marshall Auerback thinks that the election victory, as well as the performance of the Thai economy over the past few years after its recovery from the Asian Financial Crisis, is a vindication of Thaksin's economic policies.

[T]he Prime Minister's most recent triumph, along with the country's substantial economic recovery since he assumed office, surely validates the anti-IMF program he embraced during his tenure in government...

Thailand only emerged from the financial crisis of 1997-98 after the new Thaksin administration rejected the Fund's prevailing toxic mix of policies, during which public expenditures of all kinds were cut, creating "social deficits" that matched the economic and financial ones... [T]he Thai PM produced his own good fortune by rejecting prevailing economic orthodoxy through the embrace of the old Asian "Alliance Capitalism" model. This model, with its high household savings and "deep" banking intermediation, had historically proven to be a powerful mechanism for achieving a huge quantum economic leap in living standards for the majority of Asians throughout most of the post-World War II period. Collectivist Asian cultures had disciplined and cooperative work forces that could be mobilized efficiently to implement large, sophisticated projects. The "wave of good fortune" that delivered solid economic growth and allowed the country to run a balanced budget was not an accident, but one which was a product of Thaksin's embrace of a model largely responsible for the region's economic miracle.

... [W]e have consistently argued in these pages that there was nothing fundamentally wrong with the Alliance capitalism model that could not be resurrected successfully. For all of the economic destruction meted out by the financial crisis of 1997, many of Thailand's traditional attributes remained intact throughout the worst of the crisis: savings were high, inflation was low, and the country retained extraordinary rates of productivity...

Broadly speaking, Thailand's crisis, indeed that of all of emerging Asia, was above all else a function of the mass withdrawal of short-term Western capital, rather than a symptom of a fundamentally flawed economic growth model.

Auerback's "alliance capitalism" is, of course, most observers' "crony capitalism". Most people think that it isn't as benign as Auerback thinks. William Pesek Jr, in a commentary for Bloomberg, quoted Thitinan Pongsudhirak, a political science professor at ChulalongKorn University as saying:

The revisiting of the crisis in recent weeks indicated that globalization was not the sole cause of 1997. It may have created the conditions conducive to the crisis, but the disastrous cocktail of financial sector mismanagement, collusion, cronyism and corruption which hurried on its effects were made at home.

In my view, Auerback is probably correct in pointing out that there are advantages to the so-called "alliance capitalism" model. However, I think it is also true that the close alliance between government and business that this model fostered also reduced transparency in the economy. This lack of transparency facilitated corruption and mismanagement while keeping investors in the dark. By the time the problems in the Thai economy became apparent in 1997, investors were forced to make a sudden withdrawal of capital, resulting in a financial crisis.

"Alliance" capitalism may be just another one of those models that look good on paper but are difficult to implement without creating undesirable side effects.

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