How should the Thai government respond to the US economic crisis?

Amidst economic risk, the Thai government has proposed several ways to cope with the forthcoming crisis, including policy interest rate cuts, Baht devaluation, megaproject stimulation, finding new export markets, and extending the full deposit protection period from one year to three years. In this article, I will present my perspective on these issues.

I agree that policy interest rates should be cut since this would bring economic stimulation and prevent a financial market credit crunch in Thailand. With oil price decline, an interest rate cut would not significantly aggravate the inflation problem. Megaproject investment would also be good, though slow to enact through parliament, thus delaying its potentially positive effect on economic stimulation. So, I think a cash or wealth transfer at Thailand’s grassroots level would be more effective and quicker than promoting megaprojects as the poor are more likely to spend, than are the rich, who are likely to save.

In addition, the government’s megaproject expenditure should be efficient, yielding some long run returns, and targeting the most vulnerable group. Thus, I support the GVC project (Graduate Volunteer Community) employing recent graduates for community development, since unemployment is real during times of economic crisis. I also agree that the government provide training courses for the unemployed to develop their vocational skills. These human capital investments are long term projects promoting favorable results for Thailand’s economy.

Specific government measures should be provided to increase firm liquidity for such crisis-affected sectors as the agriculture, automotives and jewelry industries. To increase liquidity, I propose government implemented fiscal measures to reduce the financial and tax burden borne by firms. For example, in some severely affected crisis sectors corporate tax may be allowed in installments. Furthermore, the government may consider a short-term VAT cut to reduce production and living costs.

I disagree with Thai baht devaluation or target fixation to stimulate export, which is incompatible with current “managed float” not “fixed” exchange rate systems. Thailand’s foreign currency market would then be attacked by foreign speculators, and the inflation rate would also rise, thanks to an imported oil price rise. Instead, I propose that Thailand open up new export markets to maintain export growth. Moreover, the government should focus on intraregional cooperation to stimulate the intraregional economy, especially intraregional tourism, by decreasing intraregional travel barriers regarding passport and travel costs.

Yes, the full deposit protection period should be extended from one year to three. At worst, if the US economic crisis is chronic, it will probably stir depositor panic, resulting in deposit contraction and financial system failure. To obviate this scary scenario, an extended protection period should be passed. Currently, deposit accounts exceeding 100 and 50 million baht are not legally protected after August 2009 and August 2010 respectively.

Though the US economic crisis seems far away, Thailand’s devastation from a US economic tsunami is not far fetched. Thailand’s public and private sectors must prepare for the crisis and avoid reckless behaviour. Although the probability of destruction is not high, such destruction would be severe.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com