The debate on Thaksin, income gaps and PAD motivation

One of the latest and more interesting debates on the Thailand blog scene has been concerning the reduction in income gaps during Thailand's Thaksin years and the possible resentment of this by the PAD and Bangkok's anti Thaksin middle class groups.

The latest bout of debate was sparked by myself on bangkokpundit's article titled "Thaksin in a nutshell". Blogger Jotman posted a comment suggesting:

Thailand had made great progress in reversing income inequality. That this is one legacy of the policies of deposed Thai Prime Minister Thaksin, there can be little doubt. I wonder whether the trend also might help to explain why certain segments of Thai society strongly supported the coup d'etat. I have long suspected this. Perhaps noticing that the poor were quickly "catching up," there was some level of resentment on the part of better educated, middle class Thais.

To which I somewhat hastily replied:

I think the idea that "income gaps" were closing is grade A BS. It's another fabrication by apologists for the crook. The average wage did not increase for the rural folk under Thaksin. They were given debt relief, discounts on consumer good and bribes to vote. They did not get an increase in their farming salary.

I think you will find most middle class Thais disliked Thaksin because:

a)He was corrupt

b)He was arrogant almost beyond sane levels.

c)He put his family friends and own business ahead anyone or anything else.

Now, unlike some other bloggers I know, Bangkokpundit is devilishly detailed and will not accept polemics or a wikipedia scan. He ran a blog "Thaksin and income equality" which appeared to show I was wrong. There is some evidence to suggest that the middle class and rural poor income gap did close during the regime of Thaksin , but it is tenuous and in no way points to PAD motivation for protests.

I suggest reading the blog here. Now let's look in this with some more scrutiny.

First, pundit gives us four pieces of evidence to suggest Isaan workers gained on Bangkokians under the Thaksin regime. (Actually he gives five charts but he does not analyse the final one).
The first two charts are based on the Gini coefficient system. Pundit has already offered a quick definition:

The Gini coefficient is a measure of inequality of income distribution or inequality of wealth distribution.


Gini coefficients in Latin America are based on income; those in Asia are mainly based on expenditure, because reliable income data are often not available

Keep an eye on that bold text. We will return to it.

The next piece of information was a chart showing poverty rates by region in Thailand, and the final chart was a World Bank report showing average income by region as a fraction of Bangkok income. I printed the chart and (without markers) I took a "best case scenario" of a seven percent gain by the north east on Bangkok.

So, it appears that on paper at least, there has indeed been some closure in the income gap, which is good news for anyone who believes in fairness. But we need to ask: just how accurate is this data and how much of this was the TRT government responsible for? And did the issue really cause resentment in Bangkok?

Actual salaries and their change

First, let's drop ratios and look at what this actually means in baht terms. Nearly every economical report from the TRT years tells us that a typical Thaksin voter in demographical terms (i.e. a rural Isaan worker) would have a monthly salary of four thousand baht.

Meanwhile, a typical PAD activist probably fits the description of my wife: a middle class office worker from Bangkok. The average salary for this demographical sector varies more by individual reports but thirteen thousand baht per month is a balanced figure.

So, if we use these two salary figures and trace the gap closure as given in the world bank report, the salary gain by Isaan farmers on Bangkokians is 910 baht.

Remember, this is a best case scenario. It also does not account for inflation. If we take the inflation rate of 3.5 % from the start to the finish of Thaksin's reign, that amount in real terms becomes even smaller.


Trends before and after Thaksin takes the helm

Now let us move on to some other data. Remember that many (not just Pundit, Jotman and Fonzi or the other Thaksin apologists in the blogosphere) have pointed to the reduction in numbers below the poverty line as a result of Thaksin's "war on poverty". Any reduction in poverty is great news, but it's worth noting that this has been a massive trend that was in place well before the reign of TRT. Let's take a look at this graph and commentary from a World Bank siteresources report.

Source: worldbank.org

Sorry the chart won't come out clearly but it the blue section represents Isaan and the years go from 1988 to 2002 in two years steps. So it tells us....

The poverty headcount fell from 48 percent in 1988 to 17 percent in 2002,
and in spite of population growth, the number of poor dropped from 9 million to 4 million people.

So it seems this was a trend well in force before the millennium. However there is another interesting factoid in this report. While the poverty count was dropping, productivity was also decreasing:

Economic growth, while decent by international standards, lacks behind Thailandu-s other regions. Since 1970, annual economic growth fell short by one percentage point compared to the national average, and the Northeastu-s contribution to Thailandu-s GDP fell from 16 percent to only 9 percent even though the population share remained constant at around one third.

The main factor behind lower economic growth is weak productivity gains. Much of the Northeastu-s human, physical and natural resources are absorbed in low-yielding activities. In 2004, the Northeast worker generated only one sixth of the value added of the average worker in Bangkok, Central, East and Vicinity, and just over two-thirds of the output of a worker in the North. And the gap to other regions is rising. Since 1990, labor productivity growth in the Northeast fell short by 0.4 percent compared to the North, by 0.5 compared to Thailand, and by a remarkable 7.7 percent compared to the East

As I have said before and will repeat later, I think the idea that Bangkokians staged anti-government protests out of resentment is audacious and insulting. However, let me return an equally ludicrous and based on circumstantial evidence idea: Bangkok and the middle classes took to the streets in protest because Isaan workers were seeing an increase in wages even when their productivity was dropping! Bangkokians felt this was unfair and wanted to see people rewarded for their work rate! How's that for an equally preposterous and silly theory?


Now it's time to examine another important topic and a concern that has weighed on me for this whole debate:



Validity of the data.

There are three concerns here. Firstly, how are the salaries being measured? Many farm workers don't have an official salary. They either get cash in hand or simply shelter and food. This report (the same as the one previously quoted) tells us:

Less than two fifths of Northeast workers earned a wage at the age of 35, and just over one fifth earned a monthly wage. This compares to two thirds and one half in Bangkok, respectively. These differences in wage employment rates link back to occupation and education, as wage employment is more common outside of agriculture and among skilled workers.

There are several ways to interpret these comments and they are not accompanied by graphical data. However, it raises a crucial question: how did Thailand or the World Bank collate this data? Is it taken from a census? If so, how did the census measure undeclared income? It seems very likely that a lot of salaries paid in Isaan are informal and undeclared (to a greater proportion than Bangkok).

If the data was not census data, was it collected by government figures or the BOT? If so can we put personal views aside and simply accept that a government that sold itself strongly on aiding the poor may have vested interests in use of wealth data collected from the area?

It seems possible that the data collated is taken purely from declared salaries. Declared salaries are likely to be higher than those undeclared and the proportion of undeclared salaries in Isaan is likely to be higher than Bangkok. Thus, we could be missing a substantial set of data in this equation.

And yet, we still have not touched on another crucial factor:




Household debt.

Household debts have been raising steadily in Thailand , however the jump from 2002 (Thaksin's first full year) at 84,603 baht to 130,881 baht in 2003 was well above a yearly average. (Pasuk and Baker 2004, The Nation 2004).

Such figures could be cause for alarm. Yunyong Thaicharoen, Kiatipong Ariyapruchya, Thitima Chucherd produced an excellent paper called ."Rising Thai Household Debt: Assessing Risks and Policy Implications" which , initially, puts our mind at rest. Data from part three tells us that farm workers are the only group not to have seen an increase in household debt from 2002-2004.

But things get worse from there on in many respects. Further data confirms that north east residents have the highest percentage who feel their debts are a "heavy burden". Worse still, the agricultural group appear to be at highest risk:Source:bot.org (Authors named above)

OK So the charts don't appear to be happy about my cut and paste technique. But what this chart tells us is:

Two groups of households that perhaps are potentially more susceptible to over
optimism in income prospects is the farmer and labourer in the agricultural sector. A deeper look at the agricultural sector indicates a dissonance between cyclical trends and farmers' expectations. Over the past few years, farm income has risen markedly as a result of favourable price trends in major crops.[Did Thaksin have an effect on crop prices?] In 2002, farm income has grown considerably. Given recent favourable income growth and assurances from the government, these farmers may have increased their borrowing. The figure 4.15 on farm expectations reveals that a substantial portion of farmers in the rice, rubber, and sugarcane sectors expect prices to rise. These farmers may be particularly at risk of over-borrowing and debt stress if they have overly optimistic projections of their income path

Of course this risk cannot be directly attributed to Thaksin, but it would surely be fair to say that excess should not be encouraged in a group that are at risk. However, Pasuk Phongpaichit in her paper "Financing Thaksinomics" confirms that Thaksin diverted a huge amount of credit to the agricultural workers. In addition to agrarian debt moratoriums, we also have the Million Baht Village fund, low end consumers goods such as subsidised computers and the People's Bank loan scheme.

The most concerning statistic of all however is:
Quasi-Fiscal Activities 2002--3
(million baht)

Source: chula.ac.th (Dr Pasuk)

Looking at this quasi fiscal expenditure (i.e. money spent from state coffers ) we can see SME loans (for small businesses) People's Bank (credit for those in low income gaps) , Community enterprise loans and homes for the poor.

At this point, please recall the Gini coefficient for Asia is based on expenditure. Millions upon millions of baht was spent from state coffers in quasi-fiscal financing for expenditure in Isaan and other rural areas! What this means is that while expenditure by Isaan citizens may have increased , it did so due to huge state lending and quasi - fiscal financing. This increases the risk of financial shock on the borrowers in the event of interest rates being increased. And as noted by both Baker and the Thaicharoen, Ariyapruchya and Chucherd team, Thai interest rates are at their lowest for years and cannot be sustained at such a low level.


In conclusion
It appears that Thaksin Shiniwatra and TRT did indeed take steps to close the income gap between the rural poor of north east Thailand and the middle class wage earners primarily based in Bangkok. However, Thaksin was not a miracle worker and the actual tangible increase in wealth by the rural workers was less than one thousand baht in real terms and was depreciated by inflation.

Household debts in Isaan have increased in line with the rest of Thailand, however the burden appears to be greater for this group and their risk has been increased tremendously by lax spending with quasi fiscal funding by the previous government.

It is unlikely that Bangkok's middle classes took to the streets in protest at a decrease in salary gaps.