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Southeast Asian Affairs, Volume 2009, pp. 334-354 (Article)
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Southeast Asian Affairs 2009
THAILAND’S CRISIS OVERLOAD
Thailand has endured a succession of recent crises: the Asian ﬁnancial crisis of 1997–99, originating with the collapse of its own currency and reducing investor conﬁdence for the entire decade since; the terrible tsunami of December 2004; outbreaks of SARS and Avian Inﬂuenza; rural drought; an interminable insurrection in its southernmost Muslim provinces, producing more than 4,000 deaths; and growing concern about the consequences for Thailand of global climate change. As if all that were not enough, in 2008 an additional double crisis overwhelmed the country: a self-inﬂicted internal political crisis deepening social divisions within the country and culminating in the closure of Bangkok’s international airport in late 2008; and the repercussions of the most serious global ﬁnancial crisis since the Great Depression of the 1930s. Thailand’s immediate prospects are somber, along with the rest of East Asia. In contemplating this depressing story it is easy to lose long-term perspective. Despite the serious problems, the quality of everyday life in Thailand has continued to improve over several decades and poverty incidence has maintained its long-term decline. Thailand has already achieved essentially all of its Millennium Development Goals, well ahead of the target date of 2015, while most developing countries lag far behind schedule. The current crisis will undoubtedly produce a pronounced economic contraction and some worsening of poverty incidence. No one knows how long-lasting this episode of deglobalization will be, but it will be temporary. It should be seen in the context of long term economic improvement which can be expected to continue once the global crisis subsides.
PETER WARR is John Crawford Professor of Agricultural Economics at the Australian National University (ANU). He is also Convener of the Arndt-Corden Division of Economics and Director of the National Thai Studies Centre at ANU.
this chapter turns ﬁrst to Thailand’s current twin crises: the internal political crisis and the worldwide ﬁnancial crisis. The ruling PPP . In addition. allegedly because of corruption and because his government was said (by the generals) to be disloyal to the monarchy. To see what is likely to happen as a result of the present contraction it is helpful to look at what happened during previous economic downturns. In late 2008 the PAD’s protests against the PPP government became increasingly strident. But he was deposed by a military coup in September 2006. Opponents of Thaksin and his allies were enraged. The most important of these political entrepreneurs was Thaksin Shinawatra. but while he remained in exile after the coup. and disqualiﬁed him from ofﬁce. including the civil service. While in ofﬁce. and ironically called themselves the People’s Alliance for Democracy (PAD). now identiﬁed at their rallies by red shirts. Samak had continued to host a television cooking programme and received payment for doing so.Thailand’s Crisis Overload 335 Accordingly. a court decision banned him from political activity in Thailand and disbanded his Thai Rak Thai political party for alleged electoral fraud. Thaksin was convicted in absentia for misusing his powers while Prime Minister in support of his wife’s business interests. the military. the royal colour. The challenge arose from a group of political entrepreneurs who had successfully appealed to the massive rural electorate. the full bench of the Constitutional Court ruled that it was unconstitutional for Samak to maintain his television career while Prime Minister. won ofﬁce with rightwing veteran politician Samak Sundaravej as its leader. In the subsequent elections of January 2008 the People’s Power Party (PPP). They clashed openly and violently with Thaksin’s supporters. a clever business tycoon elected Prime Minister by large majorities in 2001 and again in 2005. Thaksin was elected by offering populist policies to the rural majority. It then places these events in longer term perspective by reviewing Thailand’s long term economic experience and in particular the impact of the last serious economic crisis to affect Thailand — the Asian ﬁnancial crisis of 1997–99. Thaksin denied any such disloyalty. a successor to Thaksin’s banned Thai Rak Thai. They now identiﬁed themselves by wearing yellow shirts. justiﬁed mainly by the claim that Samak and the PPP were mere proxies for the fugitive Thaksin. and the aristocracy. The Internal Political Crisis Thailand’s ongoing political conﬂict is about a challenge to the social dominance of the country’s traditional elite — the educated Bangkok middle class. In September.
His political discovery was to ﬁnd a way to harness the power of the rural electorate. the basis of his political support. Thaksin had demonstrated a capacity ﬁrst to enrich himself massively by manipulating government telecommunications regulators and then to use this wealth to advance himself politically. his family and his closest supporters. Samak and their allies as having demonstrated the failure of electoral democracy because it threatened the dominant position of the elite: the army. The secret was to promise them handouts at the expense of the public purse and then to deliver on those promises. The PAD were even further enraged. including PPP. But he could not attain political power without mass support. at least partially. on 2 December. some former members of the disbanded PPP agreed to ally themselves with the opposition Democrat Party. the civil service and the aristocracy. The ensuing chaos caused great damage to Thailand’s tourist industry and to commerce dependent on air freight. even further. The airport siege ended after eight days. causing its closure and demanding that Somchai step down. Thaksin remains greatly admired by the rural masses. it was a challenge to the principle of one-person-one-vote. Thaksin frightens the traditional elite and is despised by them. when the Constitutional Court voted to disband the three government coalition parties. Somchai Wongsawat. They were thus able to claim the political outcome as a victory for their tactics and the banning of PPP as a vindication of their opposition to the government on the grounds of its electoral corruption. Behind the political soap opera lies something basic: a dispute about the meaning of democracy. The essence of the PAD’s objections to Thaksin and his ‘proxies’ was not just that they had acquired power through corrupt electoral practices. They perceived the electoral successes of Thaksin. allowing its leader Abhisit Vejjajiva to become Prime Minister. He did both of those things. More fundamentally. the PAD is essentially a conservative middle class movement who desire a return. again for electoral fraud. Contrary to their name. They have . On 25 November the PAD occupied Bangkok’s Suvarnabhumi International Airport.336 Peter Warr promptly replaced him as Prime Minister with Thaksin’s brother-in-law. a claim that was seemingly vindicated by the court decisions against Thai Rak Thai and PPP. towards Thailand’s more authoritarian past. To the amazement of almost everyone. or at least the form that democracy should take in Thailand. These groups recognize the economic beneﬁts that Thaksin brought to them while in power and could not care less about his alleged corruption or his personal greed. He was then able to use this new political power to enrich himself. The PAD had previously said it would accept no other premier than Abhisit.
they demanded the possibility of a Prime Minister who was not an elected member of Parliament. Since Abhisit’s rise to power the global ﬁnancial crisis has dominated public attention and the underlying domestic political conﬂict has rightly been sidelined. Prem Tinsulanonda and Anand Panyarachun. Thaksin’s rural voters were ignorant buffaloes who should not be permitted to determine the leadership and direction of the country. The PAD pointed out that the two most respected Prime Ministers of recent decades. The recent economic forecasts of . especially among ﬁnancial institutions. The crisis has destroyed that trust. Second. There is an undeniable social class dimension to the conﬂict. Export dependent economies such as Thailand are already suffering and the prospects are for worse problems to follow. The supply of credit rests on the existence of trust. the proportion of the Parliament that is elected should be limited to 30 per cent. The Global Financial Crisis The ﬁnancial crisis is proving to be more serious than almost anyone imagined. The underlying conﬂict is deep and will not be resolved easily. or not. were not elected but appointed by the King. towards a form of democracy that suits its own circumstances. for fear that the borrower will turn out to be unable to repay. Such is the magnitude of their rural support. sometimes stumbling. as claimed. The position of the PAD was thus a rejection of one-person-one-vote electoral democracy. Beneath this is a long-standing urban disdain for the competence of the poorly educated rural people who elected Thaksin and Samak. Thailand is groping. Crudely put. That role rightfully belonged to the elite. Everyone is afraid of lending. They would have opposed Thaksin’s right to govern whether there had really been electoral fraud. Deglobalization is the latest grim addition to economic jargon. Thaksin was seen as the cunning politician who had learned how to manipulate them. the rest appointed by the elite. But when new elections are eventually held. First. that debts can and will be honoured. Once that happens. the PAD leaders demanded that Samak step down and two basic changes be made. During their opposition to Samak’s government. It is revealing that the PAD website includes a statement employing the term ‘low class’ to describe their redshirted opponents. The global supply of credit has thus evaporated and international trade has severely contracted. for many of the PAD leaders and supporters. Thaksin’s allies — ‘proxies’ or not — may well win again. Credit is the lubricant facilitating the operation of the global trading system. the crisis resumes.Thailand’s Crisis Overload 337 seen what electoral democracy can deliver and they do not like it.
Fortunately. Thailand has beneﬁted from globalization through expansion of its exports.338 Peter Warr Asian governments have proven to be uniformly too optimistic and. their direct exposure to the failing U. accounting by itself for a 20 per cent contraction in aggregate demand. but the deterioration of the intermediation function of the ﬁnancial system means that this does not yet translate into availability of credit to business enterprises that need it. particularly its exports. How does this become a decline in demand for imports from developing countries of up to ten times that magnitude? The reason is that the ﬁnancing of working capital in the advanced economies has become very expensive and in some cases it is unobtainable. When they have reached their lower desired levels. Along with many of its Southeast Asian neighbours. . The transmission is through a contraction in the demand for Thailand’s output. Thailand is no exception. While they attempt to achieve lower levels of inventories their demand for new product may contract to zero. but it will be larger than the level temporarily observed during a period of radical inventory downsizing. In January 2009. Retail and wholesale businesses respond to expensive or unobtainable working capital by cutting the size of their inventories. But the good news is that this very large inventory component of the contraction of demand is temporary. Monetary authorities in the advanced countries are pumping funds into the ﬁnancial system as rapidly as they can. Why is the contraction in exports so large? The contractions of GDP in the U. Inventories will not contract to zero. The downside is vulnerability to a contraction in export demand. and Europe are currently of the order of 2 to 4 per cent. taking into account the lower level of consumer and investor spending in the advanced economies. As the global crisis deepens there is a continuing danger of a protectionist response which could greatly deepen the economic contraction. the year-on-year contraction in Thailand’s exports was 26. The bad news is that a radical cut in the desired level of inventories magniﬁes the contraction in the demand for new product. Financial institutions are afraid to lend to them. as we will see.S. but export demand is the main story.S. Consumption and especially private investment demand have also been negatively affected. The mode of transmission of the crisis to Thailand is primarily not through its ﬁnancial institutions. as it did in the 1930s with disastrous consequences. The problem similarly does not arise from bottlenecks on the supply side of the Thai economy. the contraction in the demand for new product will abate. and European ﬁnancial institutions is small. Export demand corresponds to an extraordinary 75 per cent of Thailand’s output.5 per cent. and this is what has occurred. The new level of demand may be lower than the previous level.
and there is very little the government can do about it. can this resolve be maintained? The question arises as much for Thailand as for any other country. the Congress of the United States was an ignominious leader. reducing import spending (75 per cent of GDP). The candidates are: increasing private consumer spending (57 per cent of GDP). Consumers and investors are rattled by the economic news and there is limited scope to induce them to spend more in such an uncertain environment. But that would be a great mistake. But there is the scope to expand other components of aggregate demand. all that can be done is to ride out the storm as well as possible. then to make up the slack in aggregate demand. and increasing government spending (24 per cent of GDP). not increasing. If import demand could be reduced. government spending would need to expand by 78 per cent. If export demand contracts by 10 per cent. To make up for a 26 per cent contraction in export demand. During the Great Depression of the 1930s increasing protectionism worldwide worsened the magnitude of the global contraction. government spending has to expand by 30 per cent. once rates of import protection increase it is very difﬁcult to get rid of them later. It provides an immediate stimulus. That leaves government spending. that would leave more scope for domestic producers to take up the resulting slack in demand and this is why protection is so attractive politically in times of economic downturns. The Smoot-Hawley Tariff Act of 1930 set in train an increase in global protection that contributed to the depth of the Depression and the circumstances leading to World War II.Thailand’s Crisis Overload 339 What can Thailand do about it? So far as the contraction in export demand is concerned. The arithmetic is simple. Through its “Buy American” clause inserted into President Obama’s current ﬁnancial bailout package. . And is addictive. But if the contraction proves to be long-lasting. Protectionism is like cocaine. and so forth. In this. Both consumer spending and investment spending are declining. Nothing like that is possible. Prime Minister Abhisit’s remarks at the February 2009 summit of ASEAN leaders were encouraging in their recognition of the dangers of a resort to protectionism. but this short-run boost is achieved only at the expense of undermining the determinants of long-term economic performance. Export demand is three times the size of government spending. the Thai government of Abhisit Vejjajiva shows every sign of being a constructive regional leader in this respect. increasing private investment spending (19 per cent of GDP). the United States Congress has revealed to the world how little it has absorbed from its own history. It is imperative that the rest of the world not follow suit and succumb to the temptation to increase protection. Fortunately. not much.
4 per cent). Unfortunately. Growth of 5 per cent could be achieved with an expansion of public spending of only 20 per cent. That is desirable and it will reduce the magnitude of the recession that results. The ﬁnal column (column (6)) shows the present author’s calculation of the change in public spending that would be required to achieve the target growth rate of GDP (column (1)) given the NESDB assumptions in columns (2) to (5). But there seems no possibility that it will be sufﬁcient to prevent negative economic growth during 2009 and possibly 2010. Columns (2) to (5) show. The projected . Table 1 shows.2 per cent). The government has announced its intention to expand public spending to mitigate the impact of the contraction in aggregate demand resulting from the crisis. to achieve zero growth of real GDP virtually no expansion of public expenditure would be needed.3 per cent.340 Peter Warr There is scope for public debt to be increased and inﬂation is not currently a serious concern.2 per cent) and imports (–5. revealed that during the fourth quarter of 2008 real GDP had declined by 4. This is a particular problem in an environment where corruption in public spending is a matter of great scrutiny. exports and imports projected by the NESDB.6 per cent. private investment (–3. respectively. The same issue arises in Indonesia. exports (–6. the National Economic and Social Development Board (NESDB).1 The report also projects growth for 2009 in the major categories of aggregate demand: private consumption (2. The implications of these projections are summarized in Table 1. There is said to be a portfolio of infrastructure projects waiting on the shelf for government approval. The problem is the logistics of expanding public expenditure so quickly and by such a large amount. the real growth rates of private consumption. The problem is that almost all of the NESDB assumptions seem overly optimistic. for fear of making mistakes that could render them liable later to criminal charges of corruption or malfeasance. leading to growth for the full year of 2008 of 2. Public ofﬁcials are understandably reluctant to expand procurement quickly. A report from the government’s economic planning agency. According to these calculations. but this cannot be sufﬁcient to expand spending enough to avert a contraction of output. public investment. the government’s own economic projections do not convey this point because they are based on unduly optimistic assumptions about almost all components of aggregate demand. various illustrative target growth rates for real GDP constructed by the present author. especially export demand. These are not the immediate problems. released on 23 February 2009. Table 2 varies these assumptions in only one respect. in column (1).0 per cent).
0 3. private investment 19 per cent.0 –3. Source: Author’s calculations.2 –6.2 2.0 –3.9 14.2 2.4 –5.4 –5.2 2.0 –3.0 (2) 2.Thailand’s Crisis Overload TABLE 1 Thailand: Required Growth in Government Expenditure to Maintain Target GDP Growth Rates (%) with Export Growth as Forecast Forecast change in private investment (3) –3.4 –5.2 Note: Assumed GDP shares: private consumption 57 per cent.4 7. 341 .2 20.0 (4) –6.2 (5) –5. exports 75 per cent.4 Forecast change in export Forecast change in import Required change in public expenditure (6) 0.5 Target GDP growth rate Forecast change in private consumption (1) 0. imports 75 per cent.5 5.0 2. public expenditure 24 per cent.2 –6.2 –6. based on projections from National Economic and Social Development Board 2009.
5 (5) –5.7 83.5 –26.0 (2) 2.0 –3.4 –5.0 –3.4 –5.8 63.5 –26.0 –3.1 71.4 77.5 –26.2 2.5 5. based on projections from National Economic and Social Development Board 2009.4 –5.2 2.4 Forecast change in export Forecast change in import Required change in public expenditure (6) 54.5 –26.0 0.2 2. Source: Author’s calculations.9 Target GDP growth rate Forecast change in private consumption (1) –2.0 3. Peter Warr .342 TABLE 2 Thailand: Required Growth in Government Expenditure to Maintain Target GDP Growth Rates (%) with Export Growth as in January 2008 to January 2009 Forecast change in private investment (3) –3.0 –3.2 2.0 2.4 –5.0 (4) –26.2 Note: Assumed GDP shares: as in Table 1.
One million baht’s worth of this kind of spending generates far fewer jobs than are lost through a million baht contraction in export demand.4 per cent for low and middle-income countries. the proportional contraction in formal sector employment resulting from the export contraction will be substantially greater than the proportional contraction in GDP. –6.7 per cent (almost 5 per cent per person). meaning that more workers are laid off per million baht of output contraction in these industries than would be the case for a uniform contraction of all industries of the same money value. growing at 9. A Longer Term Perspective Long Term Growth and the Asian Financial Crisis Thailand’s long-term growth performance is described in Figure 1. the Thai economy boomed. Over the period 1968 to 1986.Thailand’s Crisis Overload 343 growth rate of exports actually observed between January 2008 and January 2009. The impact is dramatic. In any case.2 per cent. The Thai government’s assumptions seem unduly optimistic. –26. To keep the decline of real GDP to no more than 2 per cent a 55 per cent expansion of public spending would still be needed.5 per cent. III — crisis (1997 to 1999).2 But public investment tends to be more capital-intensive than the average. over the decade 1987 to 1996. compared with an average of 2. The ﬁgure identiﬁes four periods of Thailand’s recent economic history: I — Pre-boom (until 1986). the Thai economy was the fastest growing in the world. To achieve zero growth of aggregate demand. The export industries releasing employees are more labour-intensive than the average.5 per cent in real terms.3 Then. an impossible expansion of public spending of 63 per cent would be required. the expansion in public investment would thus have to be even larger than the above calculations indicate. a large contraction in GDP is inevitable. Over this decade. . maintaining aggregate demand is not the same thing as maintaining employment. showing the level of real GDP per capita in each year (vertical bars) and its growth rate (solid line) for the period 1951 to 2008. wrongly implying that it is possible for Thailand to avoid a recession during 2009. In other words. and IV — recovery (2000 to 2008). so if the actual contraction of exports during 2009 turns out to be anything like the January 2008 to January 2009 contraction. These growth rates of public spending are not feasible. is substituted for the NESDB’s projection. II — boom (1987 to 1996). especially the large infrastructure projects sitting on the government’s shelf waiting for implementation. To maintain employment. the average annual growth rate of Thailand’s real GNP was 6.
per year – LHS axis Growth rate of real GDP per capita at 2003 prices. in 1996.000 40.2 per cent. but it did not erase them. per year – RHS axis I II III Growth rate of real GDP per capita IV 20 15 10 5 0 –5 –10 –15 Source: Author’s calculations. The rate of growth of real GDP has been somewhat below its long-term trend rate and it was not until 2003 that the level of real GDP per capita had recovered to its pre-crisis level of 1996. The crisis eroded some of the gains from the economic growth that had been achieved during the long period of economic expansion.344 Peter Warr FIGURE 1 Thailand: Real GDP Per Capita and Growth of Real GDP Per Capita. The economic damage done and the hardship that resulted were both substantial. The average annual rate of growth of real GDP per person over this entire period of ﬁve-and-a-half decades was 4. the level of GDP per capita was almost 14 per cent below its level only two years earlier. and was seven times its level in 1951. Bangkok.000 20. At the low point of the crisis in 1998.000 80. Since the crisis. this reduced level of 1998 was still higher than it had been only ﬁve years before that. . 1951–2008 Level of real GDP per capita 140. using data from NESDB. in 2006 the level of real economic output per person was 19 per cent above its 1996 pre-crisis level and almost 10 times its level 55 years earlier.000 60. Despite the slower than expected recovery. because of the sustained growth that had preceded the crisis. Thailand’s economic recovery has been moderate. baht.000 100. The crisis of 1997–99 rudely interrupted this boom. Foreign direct investment has declined dramatically since 1998 and private domestic investment has remained sluggish. per cent. Nevertheless. in 1993.000 120.000 0 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Level of real GDP per capita at 2003 prices.
World Development Indicators.4 For all these countries. Along with Indonesia. The Philippines had not experienced the boom and the Asian crisis had little discernable impact. its contraction also lasted the longest. . interrupted by the Asian ﬁnancial crisis. and Indonesia from the mid-1980s to the mid-1990s. the crisis erased a fraction of the gains experienced during the preceding boom. Indonesia. The 1997–99 crisis in all three of these countries was the collapse of the export– oriented investment booms they had shared over the preceding decade. but deﬁnitely not all of those gains. in 1997–99 serious contractions occurred in Thailand. All data are indexed such that GDP per capita in 1970 = 100. FIGURE 2 Indonesia. Relative to 1996.Thailand’s Crisis Overload 345 Figure 2 places this experience in a comparative Southeast Asian perspective. 1960–2008 (Indexed to 1970 = 100) 600 500 400 300 200 100 0 1960 1962 1968 1986 1992 1994 1996 1998 2002 1964 1966 1970 1972 1974 1976 1978 1980 1982 1984 1990 2000 2004 2006 1988 Indonesia Malaysia Philippines Thailand Note: Real GDP per capita is calculated using US$ at constant 2000 prices. Thailand’s initial contraction was the most severe. Malaysia. Data on real GDP are presented for Thailand. but most other East Asian countries (except the Philippines) were not far behind. various issues. Malaysia and Indonesia. Malaysia and the Philippines. Malaysia. Booms occurred in Thailand. As Figure 2 shows. the Philippines and Thailand: Real GDP Per Capita. Thailand’s boom was the largest. Source: Calculated from World Bank.
1 6.7 9.5 23.1 27.9 27.0 23.3 100 100 100 Source: Author’s calculations.4 5.0 62. Indonesia and Malaysia: Contributions to Expenditure on GDP.8 54. various issues.6 1.0 8.5 7.2 35.9 10. 1987–2007 Country/Period Thailand Pre-crisis (1987–96) Crisis (1997–99) Post-crisis (2000–07) Indonesia Pre-crisis (1987–96) Crisis (1997–99) Post-crisis (2000–07) Malaysia Pre-crisis (1987–96) Crisis (1997–99) Post-crisis (2000–07) Consumption Investment Government Net exports Total 54.5 11. The upper section of the table shows the composition of expenditure on GDP in Thailand during the pre-crisis boom .2 11.346 Peter Warr TABLE 3 Thailand.0 26.1 37.5 18.5 5.3 100 100 100 55.0 6.5 46.8 43.0 9. Why has Thailand’s recovery been so slow? The crisis was a contraction in aggregate demand.3 –5. Where did this contraction in demand come from? Table 3 shows that it came from private investment demand.8 24. using data from World Bank.6 38.0 65.7 0.6 100 100 100 48.8 10.5 12. rather than a contraction in productive capacity.0 12. Labour and capital were underutilized because there was insufﬁcient demand for Thai output. World Development Indicators.0 57.
the share of investment in GDP collapsed by 13 percentage points. Indonesia and Malaysia.Thailand’s Crisis Overload 347 FIGURE 3 East Asia: Investment Shares of GDP. Investor conﬁdence was severely damaged by the events surrounding the crisis and during the post-crisis recovery period. It would not seem appropriate to look for country-speciﬁc causes. (1987 to 1996). Table 3 shows similar calculations for two other crisis-affected Southeast Asian economies. this share did not recover sufﬁciently to restore Thailand’s long-term rate of growth. the ﬁgure shows that the problem of sluggish post-crisis recovery of investment was shared by several East Asian economies. at least among the countries seriously affected by the crisis. the crisis (1997 to 1999) and the post-crisis recovery period (2000 to 2007). During the crisis. Malaysia. The decline of investor conﬁdence was region-wide. 1993–2007 60 50 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Thailand Indonesia Malaysia Philippines Korea Source: Author’s calculations. Finally. The pattern is similar. using data from World Bank. Indonesia. the Philippines. and Korea. This problem of reduced investor conﬁdence following the Asian ﬁnancial crisis was not unique to Thailand. various issues. Although the contraction of private investment in Thailand is at least as large as any other (Malaysia is similar). World Development Indicators. The crisis showed the possibility that investors could be bankrupted by macroeconomic events over which they have . Figure 3 shows annual data on the share of investment in GDP in ﬁve crisis-affected East Asian economies: Thailand.
these are the only data available covering a long time period. A difﬁculty in comparing these data over time is that the poverty line has been revised several times. Poverty Incidence and Inequality Is economic growth really so important? Do the poor actually beneﬁt from it. followed by outer urban. outer urban (newly established urban areas). Despite their imperfections. Poverty incidence is highest in the rural areas. and villages. changing upwards the real purchasing power that it represents. In 2006. Figure 4 focuses on the familiar headcount measure of poverty incidence: the percentage of a particular population whose household incomes per person fall below the poverty line. sanitary districts. This index potentially takes values between zero and one. or only the rich? If it is the latter. These survey data have been collected since 1962. Until recently. These correspond to inner urban (historical urban boundaries). The early data were based on small samples. and since 1988 the raw data have been available in electronic form. rural areas accounted for 86 per cent of the total number of poor people but only 64 per cent of the total population. The index for Thailand rose signiﬁcantly over the 45 years shown. which occurred at the same time. and rural areas. When these data are recalculated in terms of the share of each of these residential areas in the total number of poor people and then the share of the total population.348 Peter Warr no control and where they have little or no forewarning. with higher values indicating greater inequality. are based upon the household incomes collected in the National Statistical Ofﬁce’s Socio-Economic Survey (SES) household survey data. based on a consistent poverty line — one held constant in real purchasing power — from 1962 to 2007. respectively. but their reliability has improved steadily. Combined with the reduction in absolute poverty. which. respectively. a striking point emerges. Figure 4 summarizes the author’s attempts to compile a long-term series on poverty incidence. as in the last two rows of the table. does a contraction in growth really matter? The following discussion draws upon the ofﬁcial poverty estimates produced by the Thai government’s National Economic and Social Development Board (NESDB). Figure 4 also shows the Gini coefﬁcient of inequality. like all other available poverty estimates. The main point is that a collapse of private investment was the means by which the crisis impacted on each of these countries and that once investor conﬁdence had been damaged restoring it was a difﬁcult and slow process. this . and lowest in the inner urban areas. the SES data were classiﬁed according to residential location in the categories municipal areas.
70 0. The data reveal a considerable decline in poverty incidence up to 1996. Over the eight years from 1988 to 1996. . The data for the earlier years have been spliced together with this series from published sources so that the resulting series matches the NESDB series for the year 1988.60 Gini coefficient 0. except that the published data for Municipal Areas and Sanitary Districts have been aggregated to an ‘urban’ category using their respective population shares in the total for urban areas (the sum of the two) as weights.50 0. Bangkok.30 0.7 percentage points per year. Poverty share means the number of poor within a reference population group expressed as a proportion of the total number of poor within the whole population. In accordance with the practice of the Thai government statisticians. The headcount measure of aggregate poverty incidence is the percentage of the total population whose incomes fall below a poverty line held constant over time in real terms.00 Total Rural Urban Gini Notes: Poverty incidence means the number of poor within a reference population group expressed as a proportion of the total population of that group. both poverty incidence and inequality are based on incomes rather than expenditures in these data. rural poverty is the percentage of the rural population whose incomes fall below a poverty line held constant over time in real terms. a moderate increase to 1998. but the incomes of the rich increased even faster. and so forth. Source: Author’s calculations.40 0.Thailand’s Crisis Overload 349 FIGURE 4 Thailand: Poverty Incidence and Inequality. and a further increase over the following two years. measured poverty incidence declined by an enormous 21. The data shown are identical to data published by the National Economic and Social Development Board (NESDB) for the years 1988 to 2006.20 0.4 per cent of the population. an average rate of decline in poverty incidence of 2. 1962–2007 100 90 Poverty incidence (%) 80 70 60 50 40 30 20 10 1962 2000 2001 2002 1975 1981 1986 1990 1992 1994 1996 1998 1999 2004 2006 1969 2007 1988 0 0. Higher values of the Gini coefﬁcient indicate greater inequality. means that the real incomes of the poor increased with economic growth. Population share means the population of a reference group expressed as a proportion of the total population of that group.10 0. using data provided by the NESDB.
which captures the major impact of the Asian ﬁnancial crisis. Over the ensuing two years ending in 1998 poverty incidence increased by 1. each year.8 million). based on data for the periods before and after the crisis period.350 Peter Warr That is. over the following two years the number increased by 1 million (from 6. Reduced growth in Thailand caused by the world recession in the early to mid-1980s coincided with worsening poverty incidence in the years 1981 to 1986. the correlation between these two variables is unmistakable. one pair of observations is a clear outlier — the data point corresponding to the period 1996–98. the crisis reversed 9 per cent of the poverty reduction that had occurred during the eight-year period of economic boom immediately preceding the crisis. The data are summarized in Figure 5.8 to 7. but despite the limitations of the underlying SES data. Thailand’s economic boom of the late 1980s and early 1990s coincided with dramatically reduced poverty incidence. on average 2.9 to 6. as well as the rich. would predict . Periods of more rapid economic growth were associated with more rapid reductions in the level of absolute poverty incidence. and the real rate of growth of GDP over the corresponding period.5 per cent of the population. the contraction following the crisis of 1997–99 led to increased poverty incidence. Economic growth matters for the poor. above.1 million (from 17. Thus. Alternatively.7 per cent of the population moved from incomes below the poverty line to incomes above it. The correlation between poverty reduction and growth. calculated from the data used in Figure 4. No amount of redistribution could turn a poor country into a rich one. a reasonably clear statistical picture also emerges on the short-term relationship between poverty reductions and the rate of economic growth. Moderately rapid growth from 1962 to 1981 coincided with steadily declining poverty incidence. which plots the relationship between changes in poverty incidence. according to the ofﬁcial data.9 million). As shown in Figure 5. measured in terms of absolute numbers of people in poverty. Long term improvements in education have undoubtedly been important. Then. sustained economic growth is a necessary condition for largescale poverty alleviation. over the eight years ending in 1996 the absolute number of persons in poverty declined by 11. However. The recovery since the crisis has been associated with signiﬁcant poverty reduction. Finally. Poverty Reduction and Economic Growth What caused the long-term decline in poverty incidence? It is obvious that over the long term. It should be noted that poverty data are not available for the years 1997 to 1999.
1962–2007 12. and the rate of GDP growth over the corresponding period. the independent variable. is omitted. The ﬁrst regression includes all data points.00 8. The results are summarized in Figure 6. The 95 per cent conﬁdence interval .00 2.00 Asian financial crisis Annual GDP growth Annual change in poverty incidence Source: Author’s calculations using poverty data as in Figure 4 and GDP data from NESDB.5 per cent (the one that actually occurred) would be expected to result in an annual increase in poverty incidence of 4.00 –4. 1996–98.00 0. the dependent variable. This second equation is then used to predict the change in poverty incidence that would be expected to result from the reduction in real GDP observed in the crisis. This point is examined more systematically in Table 4 and Figure 6.00 Per cent 4. Bangkok.00 10. The estimated coefﬁcient is somewhat larger and again signiﬁcant at the 5 per cent level.00 6.00 –6. Table 4 reports two regressions on the relationship between the rate of change of poverty incidence (negative values mean a decline in poverty incidence). that a large decline in GDP such as one that occurred during the crisis period would produce a larger decline in poverty incidence than the one that actually occurred. the greater the poverty reduction) and signiﬁcant at the 5 per cent level. The estimated coefﬁcient is negative as expected (the faster the growth. An annual rate of GDP growth of –6. The second regression equation is the same except that the data point for the Asian ﬁnancial crisis period.52 per cent.00 –2.00 1981–86 1996–98 1962–69 1969–75 1975–81 1988–90 1992–94 1994–96 1986–88 1990–92 2000–02 2002–04 2004–06 1998–2000 2006–07 –8.Thailand’s Crisis Overload 351 FIGURE 5 Thailand: Poverty Incidence and Economic Growth.
729 0.416 0. p = 0. 7 95% confidence 6 5 interval 4 3 2 1 Crisis: actual 0 –5 –1 0 –2 –3 –4 –5 –6 –7 Annual Change in Poverty Incidence (%) –10 5 10 15 Annual GDP Growth (%) Source: Author’s calculations. y is the average annual rate of growth of real GDP between data points and a and b are the estimated coefﬁcients. Bangkok.433. FIGURE 6 Thailand: The Growth/Poverty Nexus and the Asian Financial Crisis Crisis: predicted. adj R 2 = 0. 6. using data as in Table 4 and Figure 5.40. Dependent variable dP. all observations Intercept Real GDP growth –0. around this prediction is [2. all observations except 1996–98.381.960 –0. F = 9.07. adj R 2 = 0.383. Source: Author’s calculations.014 R 2 = 0.346 –0.548 0.85 –2.01 0.430.0108 2. Intercept Real GDP growth 0. F = 8.35 –3. using data from the NESDB. where dP is the annual rate of change of poverty incidence between data points.0145 Note: Regression equation: dP = a + by.12]. meaning that given the estimated regression equation we can be 95 per cent conﬁdent that the level of poverty incidence that would result from a growth rate of real GDP of –6.352 Peter Warr TABLE 4 Thailand: Poverty — Growth Regressions Independent variable Coefﬁcient t-statistic p-value 1.5 per cent will lie within the .92.247 –0. Dependent variable dP.011 R 2 = 0.90 0. p = 0.
Two crises will continue to bite: the country’s unresolved internal political conﬂict and the global ﬁnancial crisis. Conclusion: Thailand’s Twin Crises The conclusion seems inescapable that hard economic times lie ahead for the Thai people. Expanded public spending will moderate the contraction that would otherwise have occurred but there is no possibility that it could expand sufﬁciently to prevent a contraction of aggregate output.92 to 6. possibly by 4 to 5 per cent. Thailand’s rival political support groups have learned that holding the public to ransom by occupying public facilities like airports is an effective tactic.Thailand’s Crisis Overload 353 range of 2. Political conﬂict will resurface when elections are next called. the observed annual increase in poverty incidence (“Crisis: actual” in the ﬁgure) was only 0. laid off from construction and manufacturing employment returned to their extended family base in the provinces. There may be more of it.12 per cent. including most major agricultural goods. Another hypothesis. Several hypotheses can be advanced for this seeming anomaly. Poverty did not increase nearly as much as would be predicted on the basis of the contraction in real GDP.8 per cent. Both export demand and private investment will be negatively affected by the global ﬁnancial crisis. supported by extensive anecdotal evidence. is that Thai people assisted one another to an unusual extent during the crisis. The economy will contract during 2009. One is that the dramatic depreciation of the baht that immediately followed the crisis raised the prices of exported commodities. There they were absorbed into the business activities of the extended family and the loss of household income (on which the poverty calculations are based) was much less than would have otherwise occurred. no one knows how soon that will happen. The net effect may have been a reduction in poverty incidence. well outside this 95 per cent conﬁdence interval. The country is as well-placed as any to emerge from the current crisis rapidly when global economic conditions improve. Changes in poverty incidence are sensitive to the rate of growth and poverty incidence will be impacted by the coming economic slowdown. Regrettably.5 Nevertheless. This beneﬁted the rural poor but harmed the urban poor. The precise form this conﬂict will take is unpredictable but it too may have adverse economic consequences. Regrettably. The Thai economy is resilient and the central bank has ample international reserves to ride out a crisis. However. an examination of the experience of the Asian ﬁnancial crisis of 1997–99 shows that poverty incidence did not increase nearly as much during that period as would . Urban workers.
respectively. Thai people assisted one another to an unusual extent during this period and this moderated the increase in poverty incidence that would otherwise have occurred. Bangkok.4 per cent and services 1. Peter Warr. 1998). 1 2 3 4 5 The sectoral composition of this reported 2.th>..2 per cent. Notes The research assistance of Razib Tuhin is gratefully acknowledged. This is presumably why a contraction in exports from China is causing a decline in total employment within China even though reported GDP growth is still 6 per cent. pp.worldbank. China’s export industries are highly labour-intensive.1 per cent. World Bank. The unusually high reported growth in agriculture arose from reported agricultural growth of 8. Thailand Economic Monitor.6 per cent in the second and third quarters. December 2008. World Development Report 1998 (New York: Oxford University Press.6 per cent and 9. World Bank Ofﬁce. Bust and Beyond”. These data warrant closer examination. ed. If the impact of the global ﬁnancial crisis proves to be as pronounced as is feared. World Bank. The author is responsible for all defects.6 per cent annual growth was agriculture 5.354 Peter Warr have been predicted from the statistical relationship between poverty incidence and economic growth. this ‘shock-absorber’ capacity of Thai society may be called upon again. . “Boom. industry 3. 2005). in Thailand Beyond the Crisis (London: Routledge. available at <www.or. 3–65.
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