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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

VIEWPOINT

Repairing Thailand
An oppositionist's solution to the economic crisis

ABHISIT VEJJAJIVA, the author of this article, is a member of Parliament and spokesman for Thailand's opposition Democrat Party


THE NEXT FEW MONTHS will prove to be extremely challenging for Thailand. Almost everybody agrees that the economy has yet to bottom out and that the country will have to go through a process of painful adjustment with zero to negative growth, higher unemployment and inflation before recovery can take place. Yet recovery will not take place automatically. The problem in Thailand is not just a cyclical downturn or crash. Fundamental structural adjustments are needed not only to keep exports and industries competitive, but in politics and society to install good governance. Indeed, in the short term, recovery is not possible unless tough decisions are taken on key macroeconomic issues and to clean up the problem in the financial sector.

The first crucial step is to recognize the problem, which is one of macroeconomic mismanagement and distorted signals leading to over-investment in unproductive sectors and, in the end, to a shift in market sentiment and outflow of capital. Authorities should stop blaming liberalization, speculators and the media. They would also do well to stop looking to the past. The current crisis is unlike any previous one since almost all the debts to be dealt with are in the private sector. The budget deficit is only starting to surface and will worsen as the financial burden from the crisis is passed on to the government. Even the IMF would do well to recognize that its formula of austerity measures designed to deal with governments having public finance problems or enjoying a consumption binge is not totally applicable here.

Nevertheless, the government has to provide a strong signal that it is serious about fiscal and monetary discipline. Its first priority is to stabilize the currency and stop outflows of capital from the country and deposits from financial institutions. That is done by building confidence, which cannot be achieved by public relations exercises or dressing up figures but by concrete and transparent actions. In particular, the government has to have a clear-cut and comprehensive package to deal with the financial sector. The executive decrees and the creation of two new institutions -- the Financial Restructuring Agency (FRA) and the Asset Management Company (AMC) -- are helpful but not enough.

The government must recognize that the existence of bad assets is not confined to the 58 suspended financial institutions and that the authorities are still pouring money into other finance companies and some banks. There should be one standard in dealing with this problem, whether the financial institution is suspended or not. The FRA/AMC strategy was conceived based on the now false assumption that the problem could effectively be contained once the suspensions were announced.

Unless the problem of bad assets in the whole system is dealt with, nobody will know the full costs of the crisis. Indeed, many will feel that the costs have not been capped and the crisis will be prolonged. Once the costs are clear, swift action is essential to distribute them. Shareholders have to be the first to lose and the government must tell the truth to the taxpayers about their burden. Any wrongdoing or fraud must be investigated and punished.

On the other side of the coin, the government has to move quickly to ensure that the good or productive assets (including those in the suspended companies) will remain so. The longer the delay in dealing with the problem, more and more assets will deteriorate and deteriorate fast, increasing the costs of the whole exercise. The process of mergers, re-capitalization and handling foreign ownership must also be fair and transparent, giving adequate returns for prospective investors while avoiding fire-sales.

On fiscal policy, the government must have a credible plan to achieve a budget surplus. It has to avoid putting too much of a burden on the people in the form of indirect taxes, which feed into cost-push inflation (on top of imported inflation following a depreciation of more than 40%) and depress economic activities which in turn reduce government revenues. The vicious cycle of high inflation, high interest rates, high taxes must not be allowed to happen. There is still room to maneuver on the expenditure side, especially given the amount of corrupt and inefficient practices present.

Again, the solution to the short-term financial problems is only halfway along the road to recovery. The government should use assistance from the World Bank and other institutions to upgrade industries and workforce skills to ensure competitiveness even when the currency settles at a higher level. It could even use this process to cushion the effect on the labor market and create opportunities that may speed up the recovery process. Other structural reforms such as privatization, bureaucratic and education reforms should be undertaken at once. They will complement political reform, which is already in progress.

Is all this possible? Thailand has displayed remarkable resilience through past economic and other crises, and no one should doubt the ability of the Thai people to come out of this one. The only missing ingredient at the moment is political leadership.


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