Thaksinomics, Redux

THE WALL STREET JOURNAL ASIA

February 22, 2008

Thailand's new Prime Minister this week gave some indication of his government's planned economic policies and it's back to the future. By promising to revive Keynesian economics, Samak Sundaravej is hearkening back to "Thaksinomics," the populist agenda that endeared former Prime Minister Thaksin Shinawatra to rural voters. While politically that might seem a savvy move, economically speaking it's a big mistake.

Mr. Samak has yet to lay out all the details of his plan, but here's what we know so far: On Monday, he delivered a policy statement to Parliament outlining his government's priorities. Citing the subprime crisis and rising inflationary pressures, Mr. Samak wants to lay the "groundwork for stable and sustainable growth," shift Thailand's manufacturing sector to higher-end products and attract foreign investment.

By using words such as "growth" and "foreign investment," Mr. Samak is distinguishing himself from the former military junta, which had a distinct disdain for both. But Mr. Samak's first order of business isn't serious structural economic reform. Like Mr. Thaksin's administration, the Samak government would prime the fiscal pump by expanding state health-care coverage, giving money to "village funds," building public housing, backing megainfrastructure projects, providing soft loans to small and medium-sized businesses, and imposing a debt moratorium for farmers. And that's just a partial list of his spending plans.

It's hard to estimate how much Mr. Thaksin spent on his Keynesian adventure, given that some of those projects weren't included on the federal government's balance sheet but, rather, funded through state banks. Rough estimates put Thaksinomics outlays around 100 billion baht ($3 billion) a year. Mr. Samak has mentioned "mega-projects" of 500 billion baht. That's big money for a central government whose total projected revenue for 2007 was 1.5 trillion baht.

The irony here is that Thaksinomics was never a great success. Mr. Thaksin's hodge-podge spending projects didn't do much to upgrade the country's export sector, attract foreign investment or boost overall economic growth. Rather, Thailand under Thaksin -- like much of the rest of Asia -- enjoyed the flood of investment dollars created by the U.S. Federal Reserve under Alan Greenspan and the upswing in export demand from the U.S., Europe and the rest of the region. As Thai exports soared, so did tax revenue.

That's not the external environment that Thailand faces today. The Fed may again be flooding the world with dollars, but as the Prime Minister notes, inflationary pressures are mounting. Thailand's consumer confidence is recovering after the military junta's economic mismanagement but it is still fragile. Foreign investment in Thailand lags that of its Asian peers. Couple that with shaky financial markets, and there's no guarantee Thailand will enjoy robust investment or buoyant export demand this year.

Mr. Samak's newly elected government would serve its constituents better if it kept its spending promises constrained and focused on making Thailand an easier place to do business. It could start by cutting corporate and personal income taxes, getting rid of all capital controls and reinvigorating free trade talks. Rather than borrowing money to increase the government deficit, Mr. Samak could aim for a balanced budget.

It's possible that the Prime Minister wants to cement his government's popularity with its rural voter base before turning to reform. But as any Japanese politician could tell you, once a government starts down a road of handouts and infrastructure spending promises, it's hard to turn back.