Stimulus packages need paradigm shift

Ever wonder why Thailand’s economic growth is consistently lower than its peers? Even with a flood of foreign tourists of 28.1 million (154.4% growth) in 2023, our GDP growth was 1.9% compared to 5.5% in the Philippines, 5% in both Indonesia and Vietnam, and 3.7% in Malaysia. The growth figure for the first half of this year of 1.9% is far worse than many of our Asean friends.
The government blames the lacklustre economic performance on inadequate macroeconomic stimuli. Therefore, strong fiscal spending, particularly the 540 billion baht digital wallet scheme, was proposed.
The scheme was expected to produce a “cyclone effect” and lift GDP growth to 5% per annum. To help stimulate the economy, the Bank of Thailand (BoT) was also pressured to lower its domestic interest rate.
The BoT argued that low GDP growth was not a result of inadequate stimuli or insufficient money supply, but rather a result of structural deficiencies. This article will show the BoT is right. Because of declining economic efficiencies, all stimulus measures will be, at best, 72.5% effective. A paradigm shift of moving from traditional fiscal and monetary policies to improving Thailand’s economic efficiencies is essential to lift economic growth towards 5%.
I went through 40 years of economic data to come up with the table. Going over a long period of data is necessary to detect structural changes in the economy. I want to understand why the mighty Thai economy with 7-8% GDP growth became a lame 2-3% growth economy.
Thailand went from the “increasing return to scale” phase during Decade 1 (1994-2003), to a “constant return to scale” phase during 2004-2008, or the first half of Decade 2, and then the “decreasing return to scale” phase starting from the second half of Decade 2 (2009-2013).
Let me explain in plain English about the meaning of the three phases of “return to scale”.
In the “increasing return to scale” phase, an economy prospers and is able to achieve high GDP growth year after year. It is like a young man with all the vitality of life. You give him 10 and he will return you 12. Hence, the term “increasing return to scale”.
In the case of Thailand in Decade 1, an investor invested 1 baht and would get back 1.218 baht, or a return of 21.8%.
Wait a minute. If Decade 1 was the golden age, why did we have a financial crisis in 1997? The answer is greed and bad management of the exchange rate regime. During that period, Thailand possessed a very high maximum growth potential of 7%. But that was not high enough to satisfy the greed.
Thailand pushed economic growth too far with GDP growth rates of 8% in 1994, 8.1% in 1995, and 5.7% in 1996, causing the economic machine to melt down. The key problem was Thailand borrowed too much from abroad to finance the overheated growth.
Almost everyone blamed the fixed exchange rate regime. I do not agree. A fixed exchange rate regime is not an inferior system. I often compare the fixed exchange rate regime vs the flexible exchange rate regime to a left-handed person vs a right-handed person. Hong Kong has adopted the fixed exchange rate regime since 1983 and its economy has been doing fine. The secret to successfully adopting a fixed exchange rate system is to keep the money supply in line with foreign reserves. The BoT violated this life-and-death rule.
Fortunately, the financial crisis caused no damage to Thailand’s economic potential. Our industries were competitively strong. GDP sprung back to 6.1% and 7.2% growth in the years 2002 and 2003, respectively. Sadly, the good times don’t last forever.
Without improving technologies, enhancing worker’s skills, and moving into higher-value-added industries, our competitiveness started to fade. The economy moved into the “constant return to scale” phase. In this phase, investors just made ends meet and saw little or no profit.
A young, active Thailand turned into a sluggish, middle-aged man.
In the first half of Decade 2 (2004-2008), if you put 1 baht into the Thai economy you would just get 1.035 baht back, or a 3.5% return. To put it bluntly, investors could be better off putting money in a bank or into government securities than doing business.
If the first half of Decade 2 was not bad enough, the second half was a complete nightmare. Thailand moved into the twilight zone of “decreasing return to scale”. Put 1 baht into the economy and you would get less than 1 baht back.
Why was money utilised so inefficiently in the second half of Decade 2? The answer could be the “First Car Scheme” which triggered massive household borrowing. I would not be surprised if the efficiency of money utilised under the recent cash-handout scheme turns out to be similar. Stimulating the economy through consumption is inefficient.
From a sluggish, middle-aged man, Thailand turned into a weak, old man waiting for retirement.
The situation of “decreasing return to scale” seems to further deteriorate in Decade 3 (2014-2023) as the efficiency rate dropped to 43.4%. If you invested 1 baht during this period, you would have got only 0.434 baht back. However, such a conclusion could be unfair as this decade included the impact of the Covid outbreak.
After taking the Covid years of 2020 and 2021 out, the number improves somewhat. The economic efficiency rate improved sharply to 72.5%, but the number was still below 100% which means that the economy was still in the “decreasing return to scale” phase.
I would like to note that it might not be totally fair to deduct the effect of the Covid outbreak in Decade 3. Decade 1 was plagued by the Tom Yum Kung crisis and Decade 2 was also impacted by the great flood of 2011.
To compare an apple with an apple, one might want to compare the efficiency rate of 43.4% with the efficiency rates of other decades. It might be time to admit that our economy has become extremely inefficient.
The table tells us one important fact. As the Thai economy becomes less and less efficient, a macroeconomic stimulus also becomes less and less efficient. Instead of throwing more money to drive consumption, policy makers should focus on using precious funds to improve economic efficiencies.
This government is doing the opposite to what the table is telling. They’re trying to increase the first 2 rows of the table, i.e., increasing fiscal spending and pressuring the BoT to allow more household debt.
If the table is right, which I am confident it is because numbers never lie, the government’s efforts will end up being in vain.
It might be too late to change the mindset of policy makers. But it is better late than never.