JPRI Occasional Paper No. 21: April 2001
Thailand's Election: More Signs of Backlash Against the West
by Marshall Auerback

In Thailand's election of January 8th of this year, the billionaire businessman Thaksin Shinawatra and his Thai Rak Thai (TRT) party won an unprecedented landslide victory in the House of Representatives. For the first time, one party actually secured an overall majority in Thailand's fractious parliament, no small achievement given the existence of over thirty different political groupings in a country polarized by great regional economic disparity. The stock market-- which plummeted 44 percent last year-- rallied substantially on the strongest showing by any party since the abolition of absolute monarchy in 1932. This is all the more remarkable when one considers that TRT's economic recovery program has met with much foreign criticism and that the leader of the party faces the risk of being banned from politics for five years following his indictment by the National Counter Corruption Commission for failing to declare 2.3 billion baht (US$50m) in stocks held in the names of his domestic servants. So, is this a retrograde step for Thailand, or does the election of this noted populist businessman reflect something more profound and, perhaps, disquieting for the West, particularly for the U.S.?

Despite the prospect of unprecedented political stability in Thailand, Western market commentators have generally expressed disquiet at the election result. The London Economist saw it as a retreat into Thailand's murky political past and as indicating that no further constructive reforms would be forthcoming. This is a somewhat simplistic analysis: it is more accurate to view the sweeping victory of the TRT party as a backlash against three years of ineffective economic reforms undertaken primarily at the behest of the International Monetary Fund (IMF) and the U.S. Treasury. Thaksin himself acknowledged as much after the election when he said that his first priority on assuming office would be to reshape national economic policy, including a shift away from many of the policy prescriptions of the IMF: "The IMF was quite tough with what they did. This was the wrong way and we would like to discuss changes."

According to Chris Baker, author of several books on Thailand, "What Thaksin represents deep, deep down is Thailand's big capital. His Thai Rak Thai party will move away from the dogmatic insistence on free markets and reducing the role of government and a little bit back towards the old Asian model." If successful, this move away from "the dogmatic insistence on free markets" may have significant implications for policy makers throughout Asia, although the increasingly unfavorable global economic backdrop does provide Thaksin and his party with a more challenging environment than that of his predecessor. Nonetheless, the thrust of Baker's assessment is correct: Thailand, like Malaysia before it, appears to be moving away from the previous government's embrace of a Western neo-liberal market model, reverting to a traditional Asian growth model of "Alliance Capitalism."

In his seminal work on the East Asian economies, Governing the Market (Princeton University Press, 1990), Robert Wade makes the point that East Asia's unprecedented growth during the post-war era is one of the most impressive leaps up the economic hierarchy in the history of nations. He maintains that the regime of Asian "Alliance Capitalism" with its high household savings and "deep" banking intermediation has proved to be a powerful mechanism for achieving this quantum economic leap. Collectivist Asian cultures, he argues, had disciplined and cooperative work forces that could be mobilized efficiently to implement large, sophisticated projects. Many in the West have argued that this model is sustainable only in an early phase of economic development; however, Wade's work uses the experience of Japan in the 1980s to illustrate that this type of model can generate high growth rates right up to reaching the global technological frontier. His book essentially rejects those (such as Alan Greenspan) who dismiss the East Asian model, with its government intervention and strategic alliances between business, labor, and government, as a failure relative to the ascendant unfettered free market capitalism of America.

What Wade praises as cooperation and the synergistic manner in which decisions have historically been allocated between markets and public administration, is dismissed by institutions such as the IMF, the Federal Reserve, the U.S. Treasury, and the Western investment community as crony capitalism. Far from being an economic miracle, the critics dismiss this model as a mirage, which, in their view, has led to inefficient investment and poor returns on capital. This is a bias largely shared by most Western market commentators, and it tends to color their current analysis of most events in Asia, including the recent election in Thailand. In their view, the reforms that the previous administration in Thailand sought to embrace, were painful, but necessary structural adjustments in order to restore high economic growth rates. But as the Economist itself acknowledged, the "reforms" implemented by the previous administration of Prime Minister Chuan Leekpai failed "to lift Thailand . . . out of economic crisis and return it to near-double-digit growth." This explains why Chuan "tends to be viewed more favorably abroad than at home" and why his Democratic Party was so comprehensively defeated, despite (or perhaps because of) the imprimatur of the Western financial community and IMF. The reality is that nations such as Thailand, which by and large adhered to the IMF policy prescriptions, have continued to suffer from sub-standard economic recoveries in 1999 and 2000, particularly in relation to countries such as Malaysia, Korea, and China, which openly flouted such conventional economic orthodoxy.

The Historical Context

In the aftermath of the financial crisis of 1997, a small minority of us wrote that Asia's crisis 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. Prior to the currency crisis, Asia did well on most macroeconomic variables: savings were high, fiscal accounts were balanced, inflation was low, education and literacy levels were rising rapidly, and the countries in the region had extraordinary productivity and economic growth rates.

True, Thailand, and Asia in general, did display high vulnerabilities to debt. But global economic consultant Frank Veneroso addressed this characteristic feature of the Asian economies in his book The 1998 Gold Book Annual :

Asia's high ratios of domestic-- not foreign-- bank intermediation is an inescapable consequence of two of its widely praised attributes: high savings rates and a fairly equal distribution of income. Asia has the highest savings rates in the world. It has a more equal distribution of income than other parts of the emerging world. Asia's "average man" saves. He is risk averse. He puts his saved income on deposit. These characteristics of Asia's savings behavior require a deep structure of bank deposits to GDP. The Asian governments tend to borrow less than Western governments. Thrifty households in Asia do not borrow for consumption as their Western counterparts do. Therefore, huge savings in the banking system must go to productive investment. Asian thrift and income equality mandate high levels of indebtedness. High levels of indebtedness imply a fragile financial structure. Under laissez faire capitalism, external shocks quickly propagate financial crises as the efforts by all parties to pursue their own self-interest result in liquidation by creditors and subsequent runs on the banks. The Asian culture of cooperation fosters government intervention and private alliances that allow for such high levels of debt.

(Chapter 7 appendix; Jefferson, Louisiana: Jefferson Financial, 1998).

It is important to note that neo-liberal capitalism has not been immune to excesses throughout its history; signs of that are becoming more readily apparent in the current high tech meltdown in the U.S. stock market. The increasing move toward globalization and free, unfettered capital flows has invariably created pressures in countries such as Thailand to incorporate neo-liberal elements into its economic model. But the experience of the last three years suggests that this hybridization impairs the Asian model's effectiveness. The election of Thaksin's party in Thailand may in part reflect a realization of this fact and an attempt to revert to a model that has historically served the country well.

New Proposals

It is true that the proposed program of the new government is not without its populist excesses: extravagant campaign pledges to give one million baht (US$23,000) to each of Thailand's seventy villages, and a health insurance scheme that would allow Thais to get any medical treatment for thirty baht ($1.30) are certainly not viable economic options for an economy still struggling under mountains of debt. However, Thaksin's call for a three-year moratorium on agricultural debts and his proposal to create a national asset management company to purchase large debts currently held by the country's banks, are not without merit and do have a certain economic logic.

The IMF, U.S. Treasury, and the Western financial community in general believe that the Asian development state can be refashioned into a Western type system with a program of financial liberalization and a measure of corporate and banking housekeeping that involves a manageable number of bankruptcies. A critique of the Thai Rak Thai program in a recent edition of the Far Eastern Economic Review reflects this bias: "[R]ather than offering a new formula for dealing with the structural and institutional woes that continue to weigh down the economy, Thaksin's revival plan is simpler and sweeter: spend more government money to bail-out debt-ridden banks and companies." This viewpoint is a na¥ve prejudice borne of ignorance of financial sector structure and dynamics. In reality, the Review's proposal for "a new formula for dealing with the structural and institutional woes that continue to weigh down the economy" is a euphemism for more of the same unthinking policies adopted by the previous government that have already generated huge social costs without any corresponding degree of debt reduction and economic growth.

Restructuring, combined with bankruptcy, can be used to extinguish existing debt. But this is a very deflationary path to real debt reduction that has been a socially costly feature of all great depressions. If corporate debt is equal to 30 percent to 50 percent of GDP, as is the case in Thailand today, debt reduction by way of bankruptcy has huge direct social costs. There are also great contagion effects. The principal lenders are banks, which are always highly leveraged; extinguishing debt through bankruptcy destroys the domestic banking system. Fire sale liquidations depress prices of domestic assets far below their actual values, causing temporary insolvency for many firms that are sound on a long-run basis. These forced liquidations, urged upon the country's major business elites by the IMF, antagonized many of them. Although there was certainly a strong element of self-interest in their opposition, many of these tycoons legitimately pointed out that even profitable companies could suffer fatal liquidity crises as a result of the collapse of trade credits when bankruptcies are widespread. When such bankruptcies were a by-product of the policies recommended by the very same foreign institutions now trying to buy them at fire-sale prices, a nationalistic, populist political response embraced not only by the country's poor, but also many of its leading businessmen, becomes more understandable. It also explains why in the aftermath of the election result, so many local investors celebrated by aggressively bidding up the stock market.

It is also worth bearing in mind that Thaksin's proposal to establish a national asset management company to take the bad loans off the hands of domestic banks is exactly the same sort of policy implemented in America during the early 1990s, when the Bush administration established the Resolution Trust Corporation in response to the Savings & Loan crisis. The rationale is the same in both cases: high real interest rates in the midst of a serious recession tend to compound debt to GDP ratios. Because corporations with significant debt burdens cannot pay high real interest charges out of cash flows, these charges must be capitalized, at least in part; that is, they must be added to the real principal of the loan. Therefore, the tendency is for real debt aggregates to grow, setting off negative recursive feedback loops that ultimately destroy economic growth, create more bankruptcies, and huge social costs through increased unemployment. Prime Minister Thaksin appears to recognize this fact. Commenting on the crushing debt burdens faced by the rural economy, he noted, "Farmers now actually pay very high interest to loan sharks. If we help them out, they will spend more wisely. . . . We are trying to make funds available to help people stand on their own two feet," in effect offering the loans as a system of micro-credit on a revolving basis. The new Prime Minister also noted the limited perspective of most Western financial institutions, banks and brokerage houses, which appear fixated on Bangkok and the manufacturing hub surrounding the Thai metropolis, while ignoring the vital importance of the remaining and substantial rural economy, where his party has gained much of its support.

What about the charge that Thaksin represents a re-emergence of old style political corruption? It is true that Thailand's election was not pristine; there were the usual charges of bribery and ballot tampering. But as the recent American presidential elections have demonstrated, this is by no means a phenomenon unique to Thailand or, indeed, East Asia as a whole. Furthermore, this criticism glosses over many of the new constitutional safeguards that have been introduced over the past three years to address the historic problem of endemic corruption. Consider the following: Thaksin is now headed for the Constitutional Court, where he will have to clear his name of allegations that he understated his assets as a cabinet minister several years ago. His case was brought by the National Counter-Corruption Commission-- an institution not even in existence until the introduction of a new constitution in 1998. The Prime Minister has reaffirmed that he would resign rather than provoke a constitutional crisis if Thailand's judiciary were to uphold the ruling against him, even though he would effectively be barred from active participation in politics for the next five years.

If the election truly marked the retrograde step that so many Western commentators have alleged, we might expect to hear stirrings of discontent from the army barracks. After all, military interventions have been a characteristic feature of the Thai political landscape since the abolition of absolute monarchy; the country has had seventeen coups and attempted coups in its seven decades of constitutional government. But there is no sign of an army takeover this time: the rule of law and constitutional democracy gradually seem to be taking root in Thailand.

It therefore appears to be somewhat simplistic to dismiss Thaksin as an embodiment of that mythical creature now so prominent in the lexicon of Western bankers' demonology: the dreaded "crony capitalist." But there may be another more insidious threat to Western financial institutions, one that the bankers dare not utter publicly. What if the Thai Rak Thai program is a success? What are the implications for the future credibility of the IMF the next time it is drawn in to sort out an economic crisis? Malaysia's Prime Minister Mahathir Mohammed could be dismissed as an idiosyncratic, firebrand nationalist, broadly unrepresentative of most East Asian regimes. But if a second leader comes along who successfully implements a credible alternative economic program, it does begin to call into question the legitimacy of the IMF and, by extension, the neo-liberal market model in the region. This in turn would give greater impetus to Asia's creating economic and political institutions that better correspond to the region's social, cultural and economic mores. If that occurs, it will almost certainly begin to dissipate the influence of the West at a time when the latter, particularly America, desperately requires continuing large influxes of Asia's surplus savings. Could this be the real source of the current disquiet?

MARSHALL AUERBACK is a British-based international portfolio strategist for David W. Tice & Associates, a global fund management firm. He has covered the Asian economies for seventeen years, including nine years working in both Hong Kong and Tokyo. Mr. Auerback graduated magna cum laude from Queen's University in Canada and then received an M.A. from Oxford University.

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