Bank of Thailand

The Thai experience (or why P-Noy <3 Yingluck shouldn't be the headline)

The Philippines it seems is engulfed in all things Hollywood at the moment. With the filming of the Bourne Legacy taking place in Manila filling the nightly news with human interest stories surrounding both actors and extras, another “courtroom drama” was unfolding in the Senate with the impeachment trial of Chief Justice Renato Corona.

Meanwhile, as the president hosted the Thai PM Yingluck Shinawatra, you could be forgiven for thinking your were watching an episode of “The Bachelor” unfold as all the major dailies focused on these two eligible single ASEAN leaders visibly at ease in each other’s company. Kris Aquino, the president’s irrepressible match-making “gossip girl” kicked things off. Such a diversion might have been timely, as the president’s ex-girlfriend was betrothed to marry a prominent congressman barely a few years after their own public version of “The Break-Up”.

All this talk of romance swamped the more substantive purpose of the Thai PM’s trip. Investment and trade flows are not quite as important as the bonds of friendship and affection it would seem. However, despite the superficiality with which this visit has been depicted, there is one important lesson that the Philippines needs to heed from the Thai experience.

With “love brewing”, it is easy to forget the controversy swirling in both the Thai PM’s and the Philippine president’s countries. Political instability and turmoil have hounded both nations. But the lesson from Thailand that I would like to draw on comes from its path to development which led to its overtaking the Philippines back in the 1980s. Their experience could be very instructive for us today as we grapple with how to make our local industries more competitive.

Back in the 1970s, the price of Thai garments were found to be 30% more expensive compared to the world market. To deal with this situation, the local association of garments makers decided to raise a levy on each spindle. The revenue raised was used to subsidize exporters. The amount of transfers depended on the volume of exports. A subcommittee set up by the Thai Textiles Manufacturing Association monitored and enforced such an agreement.

But even after taking this collective course of action, garments were still 20% more expensive when compared with competing products overseas. They then turned to the Bank of Thailand to cut energy rates and lower interest on trade bills for exporters. They persuaded the government to grant rebates on business taxes and import duties. This effectively dealt with the remaining price differential. As a result Thailand was able to break into international markets.

From this specific case*, we can begin to make some general inferences. The Thai experience shows us that the private sector should not simply wait for government to come to its aid. Domestic players need to band together and work out solutions for themselves. It is only when they have taken the initiative but still fall short that government needs to step in and provide them with the necessary incentives and support to bridge any remaining gaps.

As our exporters grapple with high fuel and energy costs and a rising peso, there is the temptation to think that we simply need to let the market dictate what products we specialize in in terms of the global supply chain. The prevailing economic philosophy governing our policy elite frowns upon subsidies and tariffs, viewing them as distortions that make markets less efficient. Worse, they tend to view these things as symptomatic of poor governance and as sources of corruption and rent-seeking.

What the Thai experience tells us is that this is not necessarily the case. Rent-seeking, particularly the kind that encourages innovation and productivity, can play a central role in national development. It takes a set of very broad minded policy and business leaders to propose such unconventional solutions. Even the leading exponents of market orthodoxy are beginning to acknowledge that without such out of the box thinking, we may end up with no manufacturing base to speak of.

If the president is interested in leaving behind a legacy beyond simply jailing his predecessor and her cohorts, it is time his administration began looking beyond the traditional policy toolkit. Such a new direction would help push the country’s growth and employment rate above its historical trend. The sustained trajectory of Thailand’s economy since the 1980s and our own under-performance during the same period should provide us with enough reason to chart such a new path.

It is not a romance with Thailand’s PM that we should be encouraging, but rather, a love affair with their formula for economic success. In the parlance of reality TV, it should be less, “The Farmer Wants a Wife” and more “Celebrity Apprentice”.

*The case of the Thai garments sector during the 1970s discussed here is based on the chapter of Richard F Doner and Ansil Ramsay in a book edited by Mushtaq Khan and Jomo K. S. entitled Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia first published in 2000 by the Cambridge University Press.

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