The debate on Thaksin and income equality (round 2)

Jotman has sparked me to blog again. The man who put forward the "theory" that thousand of Bangkokians and PAD members took to the streets in rage because of a "decline in income gaps" and motivated me to type a long response (Jotman had looked at a gini coefficient chart that amounted to a maximum gain of 910 bhat for Isaan people on Bangkokians) has now put forward another argument.

This time Jotman champions Thaksin's anti poor initiatives because of his "analysis" of the data. It appears "analysis" means he looked at two separate charts posted by Bangkok Pundit.

Jotman blogs:

Money was put to good use. Loans did not wreck the Thai economy. Whatever you call them, Thaksin's anti-poverty measures transferred lots of cash into the pockets of poor Thais. In the West, when the state makes it easier for poor folks to obtain credit, we call it social assistance. But for some reason, when this happened in Thailand -- and millions of poor people actually got their hands on some money -- they call it "bad policy."

Largely disparaging accounts of Thaksin's anti-poverty initiatives do not jive with my own analysis of the data. The fact is that Thaksin's tenure was marked by sweeping poverty reduction, despite a relatively modest increase in GDP. And if you couple this observation with the strong evidence that broader access to debt financing gave more people access to durable goods such as housing, amounting to welfare by another name.

With great respect to Jotman , I simply couldn't disagree more and I wonder how much research he has really done on his politics. He does not allow comments on his blog, so I'll have to make my response here.

I also note Jotman referred to my last post and claimed I suggested that economic data on household debt could be "bogus". Actually what I said was that the data could have been handled liberally, I certainly did not suggest it was a blatant fake. (I don't think Jotman was being malicious though, I'm sure it was a miscommunication. Thai political bloggers in English tend to be a very good bunch who like a good debate without dropping to the flame war nonsense we get so much of on line.)

Jotman also responded to my post by repeating polemics from Bangkokpundit "If Thaksin manipulated the figures, why doesn't the current government tell us the real figures, they have now had 11 months?"

This may be a good point of polemicism, but it is not an answer. How did Thailand accumulate its data on salaries if a huge proportion of Isaan farmers have no official salaries?


I don't want to make this post as long as my previous one, but let us begin by taking a look at the policy platform that formed the catalyst for Thaksin, the most dynamic and controversial politician in recent Thai history:

1) War on drugs. (A full length blog in itself. In a nutshell, the crooked police went on a killing spree with Thaksin's blessing).

2) War on corruption (A bit like David Beckham declaring war on football).

3) War on poverty or to be exact, a target of zero poverty in six years. (This is the same man who promised to eliminate Bangkok's traffic congestion in six months. I'm still waiting for him to promise Manchester City to win the Champions League "within three years").

That final goal included a 30 baht health care scheme, a debt registration programme and a Village Fund Scheme.

In short, TRT set up a huge credit system and a debt moratorium for the poor.

One of Thaksin's first acts was to transfer the sum of .....wait for it.......seven hundred and eighty one billion baht of bad debts to a state asset management company. When Jotman talks about "the rate of non-performing loans is on the decline" I wonder if he realises the reason why. The spate of NPLs borne from the Asian Financial Crises of the nineties has been transfered to the state.

It doesn't stop there. Thaksin set up a Village Development fund, an SME loan system and an Agrarian Bank all for the purpose of directing credit at the poor and clearing old debts. After repeated failed negotiations with commercial banks, Thaksin gave up and simply cleared the debts via state groups for the government banks and basically forced them to lend.

And lend they did. Under the Village Development scheme, village leaders were given one million baht and authorised to allocate the funds (a maximum of 20k per time) to villagers. The Agrarian Bank set up a small loans system. Credit card restrictions were loosened and allocated to smaller earners. The name of the game was credit, credit credit.

In essence, it was a huge gamble on stimulating consumption and to an extent, it worked, albeit at the huge expense of the state via quasi fiscal spending (another point Jotman omits to note as it does not suit his argument). Private consumption went up above pre crisis levels even as productivity decreased.

But how was the money spent? If it was directed into investments, produce and education it could have been highly beneficial. However, despite the rhetoric from Jotman that "money is being put to good use", genuine research tells another story.

The poverty figures quoted by Jotman come from the NESDB ( National Economic and Social Development Board) . I am unable to find any other data covering the same period so we have to take NESDB's word for it, but there is a problem....


The NESDB stated that of all their funds distributed in the Village Development programme, only two percent were used for consolidation purposes. Meanwhile the Chamber of Commerce estimated that forty percent of recipients used the cash to consolidate other debts and a survey by a farmer's group put the figures as high as seventy percent! (Source: "Thaksin: The Business of Politics in Thailand" by Pasuk and Baker)

Given these monster discrepancies, can we put absolute faith in NESDB figures?

So let's re-cap. Thaksin allocated a lot of credit by forgiving bad debts (at state expense) and pushing unwilling banks to allocate further credit to create a consumption stimulus. Now let's look at the aftermath of all that spending.

Household credit did increase substantially, despite Jotman's claims that it was "relatively low measured against other countries" (Jotman was referring I cited in my previous blog concerning his 'income equality' argument which I felt was totally untrue) . Thailand's own levels of debt rose substantially but not alarmingly. However, what is alarming - as stated in the same paper and explained by myself in my previous blog - is the artificially low interest rate, the fact that Isaan people see debts as the greatest burden and their vulnerability to economic shock. A hike in interest rates could spell serious trouble for this sector.

So what Jotman's analysis amounts to is two graphs, one of which is highly suspect. The reality of the situation is that we have is a scheme that may have stimulated short term consumption (credit to Thaksin for that) but coincided with a drop in GDP (which ironically Jotman cites as evidence for Thaksin's greatness) and a highly vulnerable group that have used debt through official channels for consolidation, have not received genuine opportunities for further investment or education and could be set for massive default loans if the economy does not pick up as expected.

It may sound cynical, but it's a fact that throwing money or credit at people who lack the education or understanding to use it does not help in the long term. Left wingers and Thaksin apologists often respond to this argument with knee jerk, fashionable accusations of "contempt for the poor" or something similar. In fact, such observations about the reality of the situation for poor people in Thailand are in my opinion the kindest and most respectful. The rural workers of Thailand are wonderful people who play an important part in tradition, culture and productivity. They deserve more than 'short fix' schemes designed to buy votes and allow corrupt politicians to run rampant. They deserve huge investments in education that allow them to change the future for their families.

Thaksin undoubtedly had some good policy platforms for the poor. Some worked, some did not. His populist rhetoric and encouragement to indulge in great credit may yet prove to be a great liability.

Oh by the way, there is a another part of Thailand suffering from poverty in the deep south. Little has improved for them.

Let me leave you with these two quotes:

"The fact is that Thaksin's tenure was marked by sweeping poverty reduction, despite a relatively modest increase in GDP. And if you couple this observation with the strong evidence that broader access to debt financing gave more people access to durable goods such as housing, amounting to welfare by another name"

Jotman

The Principle of Productivity of Debt asserts that the ratio of net gain in GNP to the gain in debt must never be allowed to become negative. If this principle is observed, then debt is properly harnessed and constrained, and is socially beneficial, It makes a positive contribution to economic growth and public welfare.

Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland