The debate on Thaksin and income equality (round 2)

Jotman has sparked me to blog again. The man who put forward the "theory" that thousand of Bangkokians and PAD members took to the streets in rage because of a "decline in income gaps" and motivated me to type a long response (Jotman had looked at a gini coefficient chart that amounted to a maximum gain of 910 bhat for Isaan people on Bangkokians) has now put forward another argument.

This time Jotman champions Thaksin's anti poor initiatives because of his "analysis" of the data. It appears "analysis" means he looked at two separate charts posted by Bangkok Pundit.

Jotman blogs:

Money was put to good use. Loans did not wreck the Thai economy. Whatever you call them, Thaksin's anti-poverty measures transferred lots of cash into the pockets of poor Thais. In the West, when the state makes it easier for poor folks to obtain credit, we call it social assistance. But for some reason, when this happened in Thailand -- and millions of poor people actually got their hands on some money -- they call it "bad policy."

Largely disparaging accounts of Thaksin's anti-poverty initiatives do not jive with my own analysis of the data. The fact is that Thaksin's tenure was marked by sweeping poverty reduction, despite a relatively modest increase in GDP. And if you couple this observation with the strong evidence that broader access to debt financing gave more people access to durable goods such as housing, amounting to welfare by another name.

With great respect to Jotman , I simply couldn't disagree more and I wonder how much research he has really done on his politics. He does not allow comments on his blog, so I'll have to make my response here.

I also note Jotman referred to my last post and claimed I suggested that economic data on household debt could be "bogus". Actually what I said was that the data could have been handled liberally, I certainly did not suggest it was a blatant fake. (I don't think Jotman was being malicious though, I'm sure it was a miscommunication. Thai political bloggers in English tend to be a very good bunch who like a good debate without dropping to the flame war nonsense we get so much of on line.)

Jotman also responded to my post by repeating polemics from Bangkokpundit "If Thaksin manipulated the figures, why doesn't the current government tell us the real figures, they have now had 11 months?"

This may be a good point of polemicism, but it is not an answer. How did Thailand accumulate its data on salaries if a huge proportion of Isaan farmers have no official salaries?


I don't want to make this post as long as my previous one, but let us begin by taking a look at the policy platform that formed the catalyst for Thaksin, the most dynamic and controversial politician in recent Thai history:

1) War on drugs. (A full length blog in itself. In a nutshell, the crooked police went on a killing spree with Thaksin's blessing).

2) War on corruption (A bit like David Beckham declaring war on football).

3) War on poverty or to be exact, a target of zero poverty in six years. (This is the same man who promised to eliminate Bangkok's traffic congestion in six months. I'm still waiting for him to promise Manchester City to win the Champions League "within three years").

That final goal included a 30 baht health care scheme, a debt registration programme and a Village Fund Scheme.

In short, TRT set up a huge credit system and a debt moratorium for the poor.

One of Thaksin's first acts was to transfer the sum of .....wait for it.......seven hundred and eighty one billion baht of bad debts to a state asset management company. When Jotman talks about "the rate of non-performing loans is on the decline" I wonder if he realises the reason why. The spate of NPLs borne from the Asian Financial Crises of the nineties has been transfered to the state.

It doesn't stop there. Thaksin set up a Village Development fund, an SME loan system and an Agrarian Bank all for the purpose of directing credit at the poor and clearing old debts. After repeated failed negotiations with commercial banks, Thaksin gave up and simply cleared the debts via state groups for the government banks and basically forced them to lend.

And lend they did. Under the Village Development scheme, village leaders were given one million baht and authorised to allocate the funds (a maximum of 20k per time) to villagers. The Agrarian Bank set up a small loans system. Credit card restrictions were loosened and allocated to smaller earners. The name of the game was credit, credit credit.

In essence, it was a huge gamble on stimulating consumption and to an extent, it worked, albeit at the huge expense of the state via quasi fiscal spending (another point Jotman omits to note as it does not suit his argument). Private consumption went up above pre crisis levels even as productivity decreased.

But how was the money spent? If it was directed into investments, produce and education it could have been highly beneficial. However, despite the rhetoric from Jotman that "money is being put to good use", genuine research tells another story.

The poverty figures quoted by Jotman come from the NESDB ( National Economic and Social Development Board) . I am unable to find any other data covering the same period so we have to take NESDB's word for it, but there is a problem....


The NESDB stated that of all their funds distributed in the Village Development programme, only two percent were used for consolidation purposes. Meanwhile the Chamber of Commerce estimated that forty percent of recipients used the cash to consolidate other debts and a survey by a farmer's group put the figures as high as seventy percent! (Source: "Thaksin: The Business of Politics in Thailand" by Pasuk and Baker)

Given these monster discrepancies, can we put absolute faith in NESDB figures?

So let's re-cap. Thaksin allocated a lot of credit by forgiving bad debts (at state expense) and pushing unwilling banks to allocate further credit to create a consumption stimulus. Now let's look at the aftermath of all that spending.

Household credit did increase substantially, despite Jotman's claims that it was "relatively low measured against other countries" (Jotman was referring I cited in my previous blog concerning his 'income equality' argument which I felt was totally untrue) . Thailand's own levels of debt rose substantially but not alarmingly. However, what is alarming - as stated in the same paper and explained by myself in my previous blog - is the artificially low interest rate, the fact that Isaan people see debts as the greatest burden and their vulnerability to economic shock. A hike in interest rates could spell serious trouble for this sector.

So what Jotman's analysis amounts to is two graphs, one of which is highly suspect. The reality of the situation is that we have is a scheme that may have stimulated short term consumption (credit to Thaksin for that) but coincided with a drop in GDP (which ironically Jotman cites as evidence for Thaksin's greatness) and a highly vulnerable group that have used debt through official channels for consolidation, have not received genuine opportunities for further investment or education and could be set for massive default loans if the economy does not pick up as expected.

It may sound cynical, but it's a fact that throwing money or credit at people who lack the education or understanding to use it does not help in the long term. Left wingers and Thaksin apologists often respond to this argument with knee jerk, fashionable accusations of "contempt for the poor" or something similar. In fact, such observations about the reality of the situation for poor people in Thailand are in my opinion the kindest and most respectful. The rural workers of Thailand are wonderful people who play an important part in tradition, culture and productivity. They deserve more than 'short fix' schemes designed to buy votes and allow corrupt politicians to run rampant. They deserve huge investments in education that allow them to change the future for their families.

Thaksin undoubtedly had some good policy platforms for the poor. Some worked, some did not. His populist rhetoric and encouragement to indulge in great credit may yet prove to be a great liability.

Oh by the way, there is a another part of Thailand suffering from poverty in the deep south. Little has improved for them.

Let me leave you with these two quotes:

"The fact is that Thaksin's tenure was marked by sweeping poverty reduction, despite a relatively modest increase in GDP. And if you couple this observation with the strong evidence that broader access to debt financing gave more people access to durable goods such as housing, amounting to welfare by another name"

Jotman

The Principle of Productivity of Debt asserts that the ratio of net gain in GNP to the gain in debt must never be allowed to become negative. If this principle is observed, then debt is properly harnessed and constrained, and is socially beneficial, It makes a positive contribution to economic growth and public welfare.

Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland

The debate on Thaksin, income gaps and PAD motivation

One of the latest and more interesting debates on the Thailand blog scene has been concerning the reduction in income gaps during Thailand's Thaksin years and the possible resentment of this by the PAD and Bangkok's anti Thaksin middle class groups.

The latest bout of debate was sparked by myself on bangkokpundit's article titled "Thaksin in a nutshell". Blogger Jotman posted a comment suggesting:

Thailand had made great progress in reversing income inequality. That this is one legacy of the policies of deposed Thai Prime Minister Thaksin, there can be little doubt. I wonder whether the trend also might help to explain why certain segments of Thai society strongly supported the coup d'etat. I have long suspected this. Perhaps noticing that the poor were quickly "catching up," there was some level of resentment on the part of better educated, middle class Thais.

To which I somewhat hastily replied:

I think the idea that "income gaps" were closing is grade A BS. It's another fabrication by apologists for the crook. The average wage did not increase for the rural folk under Thaksin. They were given debt relief, discounts on consumer good and bribes to vote. They did not get an increase in their farming salary.

I think you will find most middle class Thais disliked Thaksin because:

a)He was corrupt

b)He was arrogant almost beyond sane levels.

c)He put his family friends and own business ahead anyone or anything else.

Now, unlike some other bloggers I know, Bangkokpundit is devilishly detailed and will not accept polemics or a wikipedia scan. He ran a blog "Thaksin and income equality" which appeared to show I was wrong. There is some evidence to suggest that the middle class and rural poor income gap did close during the regime of Thaksin , but it is tenuous and in no way points to PAD motivation for protests.

I suggest reading the blog here. Now let's look in this with some more scrutiny.

First, pundit gives us four pieces of evidence to suggest Isaan workers gained on Bangkokians under the Thaksin regime. (Actually he gives five charts but he does not analyse the final one).
The first two charts are based on the Gini coefficient system. Pundit has already offered a quick definition:

The Gini coefficient is a measure of inequality of income distribution or inequality of wealth distribution.


Gini coefficients in Latin America are based on income; those in Asia are mainly based on expenditure, because reliable income data are often not available

Keep an eye on that bold text. We will return to it.

The next piece of information was a chart showing poverty rates by region in Thailand, and the final chart was a World Bank report showing average income by region as a fraction of Bangkok income. I printed the chart and (without markers) I took a "best case scenario" of a seven percent gain by the north east on Bangkok.

So, it appears that on paper at least, there has indeed been some closure in the income gap, which is good news for anyone who believes in fairness. But we need to ask: just how accurate is this data and how much of this was the TRT government responsible for? And did the issue really cause resentment in Bangkok?

Actual salaries and their change

First, let's drop ratios and look at what this actually means in baht terms. Nearly every economical report from the TRT years tells us that a typical Thaksin voter in demographical terms (i.e. a rural Isaan worker) would have a monthly salary of four thousand baht.

Meanwhile, a typical PAD activist probably fits the description of my wife: a middle class office worker from Bangkok. The average salary for this demographical sector varies more by individual reports but thirteen thousand baht per month is a balanced figure.

So, if we use these two salary figures and trace the gap closure as given in the world bank report, the salary gain by Isaan farmers on Bangkokians is 910 baht.

Remember, this is a best case scenario. It also does not account for inflation. If we take the inflation rate of 3.5 % from the start to the finish of Thaksin's reign, that amount in real terms becomes even smaller.


Trends before and after Thaksin takes the helm

Now let us move on to some other data. Remember that many (not just Pundit, Jotman and Fonzi or the other Thaksin apologists in the blogosphere) have pointed to the reduction in numbers below the poverty line as a result of Thaksin's "war on poverty". Any reduction in poverty is great news, but it's worth noting that this has been a massive trend that was in place well before the reign of TRT. Let's take a look at this graph and commentary from a World Bank siteresources report.

Source: worldbank.org

Sorry the chart won't come out clearly but it the blue section represents Isaan and the years go from 1988 to 2002 in two years steps. So it tells us....

The poverty headcount fell from 48 percent in 1988 to 17 percent in 2002,
and in spite of population growth, the number of poor dropped from 9 million to 4 million people.

So it seems this was a trend well in force before the millennium. However there is another interesting factoid in this report. While the poverty count was dropping, productivity was also decreasing:

Economic growth, while decent by international standards, lacks behind Thailandu-s other regions. Since 1970, annual economic growth fell short by one percentage point compared to the national average, and the Northeastu-s contribution to Thailandu-s GDP fell from 16 percent to only 9 percent even though the population share remained constant at around one third.

The main factor behind lower economic growth is weak productivity gains. Much of the Northeastu-s human, physical and natural resources are absorbed in low-yielding activities. In 2004, the Northeast worker generated only one sixth of the value added of the average worker in Bangkok, Central, East and Vicinity, and just over two-thirds of the output of a worker in the North. And the gap to other regions is rising. Since 1990, labor productivity growth in the Northeast fell short by 0.4 percent compared to the North, by 0.5 compared to Thailand, and by a remarkable 7.7 percent compared to the East

As I have said before and will repeat later, I think the idea that Bangkokians staged anti-government protests out of resentment is audacious and insulting. However, let me return an equally ludicrous and based on circumstantial evidence idea: Bangkok and the middle classes took to the streets in protest because Isaan workers were seeing an increase in wages even when their productivity was dropping! Bangkokians felt this was unfair and wanted to see people rewarded for their work rate! How's that for an equally preposterous and silly theory?


Now it's time to examine another important topic and a concern that has weighed on me for this whole debate:



Validity of the data.

There are three concerns here. Firstly, how are the salaries being measured? Many farm workers don't have an official salary. They either get cash in hand or simply shelter and food. This report (the same as the one previously quoted) tells us:

Less than two fifths of Northeast workers earned a wage at the age of 35, and just over one fifth earned a monthly wage. This compares to two thirds and one half in Bangkok, respectively. These differences in wage employment rates link back to occupation and education, as wage employment is more common outside of agriculture and among skilled workers.

There are several ways to interpret these comments and they are not accompanied by graphical data. However, it raises a crucial question: how did Thailand or the World Bank collate this data? Is it taken from a census? If so, how did the census measure undeclared income? It seems very likely that a lot of salaries paid in Isaan are informal and undeclared (to a greater proportion than Bangkok).

If the data was not census data, was it collected by government figures or the BOT? If so can we put personal views aside and simply accept that a government that sold itself strongly on aiding the poor may have vested interests in use of wealth data collected from the area?

It seems possible that the data collated is taken purely from declared salaries. Declared salaries are likely to be higher than those undeclared and the proportion of undeclared salaries in Isaan is likely to be higher than Bangkok. Thus, we could be missing a substantial set of data in this equation.

And yet, we still have not touched on another crucial factor:




Household debt.

Household debts have been raising steadily in Thailand , however the jump from 2002 (Thaksin's first full year) at 84,603 baht to 130,881 baht in 2003 was well above a yearly average. (Pasuk and Baker 2004, The Nation 2004).

Such figures could be cause for alarm. Yunyong Thaicharoen, Kiatipong Ariyapruchya, Thitima Chucherd produced an excellent paper called ."Rising Thai Household Debt: Assessing Risks and Policy Implications" which , initially, puts our mind at rest. Data from part three tells us that farm workers are the only group not to have seen an increase in household debt from 2002-2004.

But things get worse from there on in many respects. Further data confirms that north east residents have the highest percentage who feel their debts are a "heavy burden". Worse still, the agricultural group appear to be at highest risk:Source:bot.org (Authors named above)

OK So the charts don't appear to be happy about my cut and paste technique. But what this chart tells us is:

Two groups of households that perhaps are potentially more susceptible to over
optimism in income prospects is the farmer and labourer in the agricultural sector. A deeper look at the agricultural sector indicates a dissonance between cyclical trends and farmers' expectations. Over the past few years, farm income has risen markedly as a result of favourable price trends in major crops.[Did Thaksin have an effect on crop prices?] In 2002, farm income has grown considerably. Given recent favourable income growth and assurances from the government, these farmers may have increased their borrowing. The figure 4.15 on farm expectations reveals that a substantial portion of farmers in the rice, rubber, and sugarcane sectors expect prices to rise. These farmers may be particularly at risk of over-borrowing and debt stress if they have overly optimistic projections of their income path

Of course this risk cannot be directly attributed to Thaksin, but it would surely be fair to say that excess should not be encouraged in a group that are at risk. However, Pasuk Phongpaichit in her paper "Financing Thaksinomics" confirms that Thaksin diverted a huge amount of credit to the agricultural workers. In addition to agrarian debt moratoriums, we also have the Million Baht Village fund, low end consumers goods such as subsidised computers and the People's Bank loan scheme.

The most concerning statistic of all however is:
Quasi-Fiscal Activities 2002--3
(million baht)

Source: chula.ac.th (Dr Pasuk)

Looking at this quasi fiscal expenditure (i.e. money spent from state coffers ) we can see SME loans (for small businesses) People's Bank (credit for those in low income gaps) , Community enterprise loans and homes for the poor.

At this point, please recall the Gini coefficient for Asia is based on expenditure. Millions upon millions of baht was spent from state coffers in quasi-fiscal financing for expenditure in Isaan and other rural areas! What this means is that while expenditure by Isaan citizens may have increased , it did so due to huge state lending and quasi - fiscal financing. This increases the risk of financial shock on the borrowers in the event of interest rates being increased. And as noted by both Baker and the Thaicharoen, Ariyapruchya and Chucherd team, Thai interest rates are at their lowest for years and cannot be sustained at such a low level.


In conclusion
It appears that Thaksin Shiniwatra and TRT did indeed take steps to close the income gap between the rural poor of north east Thailand and the middle class wage earners primarily based in Bangkok. However, Thaksin was not a miracle worker and the actual tangible increase in wealth by the rural workers was less than one thousand baht in real terms and was depreciated by inflation.

Household debts in Isaan have increased in line with the rest of Thailand, however the burden appears to be greater for this group and their risk has been increased tremendously by lax spending with quasi fiscal funding by the previous government.

It is unlikely that Bangkok's middle classes took to the streets in protest at a decrease in salary gaps.