Bangkok Post: 18/11/08
Supplementary budget must focus on protecting jobs
The public disagreement between key economic ministers over the proposed 100-billion-baht supplementary budget has been a disgrace.
The Minister of Finance announced publicly that he had called me, as his Shadow, to ask if I was in agreement with his plan to propose this additional government spending. I said immediately that, in principle, yes; but I needed to see detailed spending plans in order to give full consent. I assumed he had clear ideas how this money was to be used. I now realise that this was not the case.
Back in January, our shadow finance team proposed to the then Finance Minister that his government issue a supplementary budget we had detailed four expenditure items, and I recall that the amount came near enough to be rounded up to 50 billion baht.
We had calculated from the bottom up starting with actual needs and ended up with a total figure. Call me old-fashioned, but I had always thought that was how you should decide how much money you spend. In the current government's case, they appear to have done the opposite, and now cannot agree on how to use the total sum.
I am assuming they will work out their differences in the cabinet meeting tomorrow. Unfortunately, it is likely that they will mis-spend the funds, just as Mr Thaksin did in 2005, though at least the supplementary budget then was the result of a fiscal surplus, rather than an enlarged deficit.
The Democrats think it should be about saving jobs. Throwing money indiscriminately at the rural grassroots will obviously boost short-term consumption (and votes) and thus the economy. However, it would be like the proverbial flash in the pan and jobs will still be at risk, as the current threat of unemployment has more to do with a slowdown in export orders and ongoing softness in domestic demand not a problem that can be solved by a spurt of rural spending.
I had met with the business community in various provinces over the past week, including those in Ratchaburi, Sukhothai, Phitsanulok and Nakhon Sawan. They had very similar tales. Recent volatility has been a huge problem for operators in all business sectors. Demand has fallen sharply, as have prices for their products. Government response has been muddled and, in many cases, harmful to producers, as government intervention has caused biased results against their interests.
Fundamental observations were made that Thai products remained susceptible to the slightest changes in market conditions, and that as soon as demand fell, so did prices. This was taken to be a clear sign that Thai goods simply had little or no quality distinctiveness that would normally create a level of resilience during downturns.
It was thus a disappointment that government measures were no more than knee-jerk reactions to save political face, without any meaningful consideration as to the root cause of the problems.
In agriculture, there were complaints that ad-hoc rice price guarantees were always made close to harvest seasons, when they should be set, with proper planning, at the planting stage in order to serve as a guide to farmers. Guarantees should also be set not by whatever the market price might be at the time, but by more rational basis related to actual costs. As it is, the government has announced price guarantees at 40% above market price for rice, 25% for corn and most recently 15% for palm. Other than political considerations, how could the government explain the discrepancy?
The livestock industry was even more bitter when prices were high, the government intervened to put a cap on their profits. Now that feedmill prices are lower, the government has intervened in order to ensure they cannot enjoy lower costs.
There may be votes won in guaranteeing an above-market price for corn, but the government has completely overlooked the effect on users of corn in upstream industries.
There were also many complaints about the lack of clarity or commitment to an energy policy. Now that oil prices have dropped below US$60 per barrel, it seems as if the urgency behind the creation of an alternative fuel policy has dissipated. This includes a lack of commitment to investments in logistics, especially rail, which has particular impact on the provinces of Phitsanulok and Nakhon Sawan.
The Democrats' view of alternative energy has always been that it needs to be looked at as an agricultural policy as much as an energy policy. Growers of energy crops need certainty of off-take price and volume while refiners and marketers need to be confident of supply.
Turn to the finance side and there is no good news.
Small- and medium-sized businesses (SMEs) have always been at a disadvantage in terms of access to financial backing. The situation is now even more dire, as banks have become more risk averse. Government financial institutions provide no solution.
In general, all SMEs complain that requirements for hard asset as collateral means that they cannot access needed working capital, especially now that cash flow is tight for small operators as their customers stretch out payment terms.
With orders in most businesses already in decline, this will surely lead to lower working hours for those who depend on over-time work to make ends meet. The US and Euro-zone is now in recession with two consecutive quarters of GDP declines. The Chinese economy is slowing much faster than anticipated and even the Gulf economies have been suffering as a result of the global crisis.
Measures taken by various countries now appear to be less potentially effective in the short-term than hoped. The US has completely revised usage of the US$700 billion approved by Congress just over a month ago, while the Chinese plan to provide fiscal stimulation to the economy is now understood to involve much less fresh money than the headline number suggested. Interest rates can still fall, but there is doubt that this would have much immediate impact on global demand.
There is an expectation of continued slowdown well into the next year in the Western economies.
We need to do two things in the meantime keep people employed and stimulate investment so that Thailand emerges as a competitive economy in the next upturn. In short, the government needs to address the needs of the producers and not waste all their resources on state-funded vote buying.
Moreover, the government really needs to get its act together fast. It really is time to put politics aside. There are two economic PhD's in charge and if nothing else, they should know that resources are scarce, and this is absolutely no time to be wasting them.
If we cannot retain current levels of employment, no populist measures will be enough to give the grassroots the economic protection they need.
Similarly, if we cannot stimulate the investment needed to improve competitiveness, we will always remain trapped as a low-value producer.
Korn Chatikavanij