Monday, 11 July 2011
Do and don't for Yingluck
Being the first female prime minister doesn't give Yingluck Shinawatra the right to try economic or welfare stunts. That's what experts are telling the new government. In this special report, key economic policies are subject to a cost-benefit analysis.
The results echo concerns expressed elsewhere: some initiatives are fine, but others had better be left on the drawing board.
What she shouldn't do
RICE-PLEDGING PROGRAMME ERODES THAILAND'S COMPETITIVENESS
Although a campaign promise, the Pheu Thai-led government should not bring back the rice-mortgage scheme, as the country's international prestige as a producer and exporter of high quality rice would be ruined in a flash.
The policy would undermine the Kingdom's competitive edge in the world market, as other exporting countries use Thai prices as their benchmark. With better yields, they can undercut Thai quotes. Thai rice may lose market share because faltering economies have caused consumers to focus on price rather than quality.
Exporters say the policy would discourage farmers from continuing to improve grain quality, as they could pawn their crops to the government at high prices without quality concerns.
It remains to be seen how the government could ensure that farmers will directly benefit from the scheme, as in the past, they suffered while millers were the real winners. A higher domestic price than in neighbouring countries would create smuggling problems from Cambodia and possibly Burma.
To promote sustainable development of rice, the government should concentrate on expanding the irrigation system and spending more on research and development of high quality, high yielding seeds.
HIKING THE MINIMUM WAGE AND STARTING SALARY COULD TIP SMEs INTO BANKRUPTCY
Raising the minimum daily wage to Bt300 and the starting salary of new graduates to Bt15,000, beginning with state enterprises and the civil service, would squeeze SMEs, which make up more than 90 per cent of businesses, and in some cases close down. Skilled workers and other staff in companies would be encouraged to push for higher pay. Firms would have to shoulder higher welfare expenses in line with payroll increases.
Manufacturers are already offering attractive wages now, which may be higher than the government's current minimum wage, due to labour shortages. For new graduates, the private sector pays an average Bt8,000-Bt15,000, while new civil servants will get Bt9,100.
Unreasonable wages would force SMEs with limited working capital to shut down when they cannot absorb significant cost increases. Labour-intensive exporters such as garment and shoe makers would have to shift to nations with cheaper wages to stay competitive. Thailand would be less attractive to investors.
According to the Office of Small and Medium Enterprises Promotion, 2.9 million companies are SMEs and account for 99.6 per cent of all businesses in the country. SMEs employ 10.5 million people, or 78 per cent of the workforce. They generate Bt3.75 trillion a year, accounting for 37 per cent of economic value.
What factors did the party use as the basis for calculating its rates? Workers' compensation should be developed step-by-step instead of launched in one go nationwide. Partial increases should be scheduled over time to allow manufacturers to prepare a cost management plan for the future. The rates should also take into consideration the different levels of economic development among the provinces.
The policy could actually end up creating an unemployment problem.
CORPORATE TAX SHOULD NOT BE CUT WITHOUT A PLAN TO REVAMP THE TAX SYSTEM
If the government cuts corporate income tax from 30 to 23 per cent next year, it should also raise the value-added tax from 7 to 10 per cent, or 8-10 per cent. Or it should increase other taxes, or introduce new taxes. The alternative solution is a corporate tax cut accompanied by cancellation of tax incentives under the Board of Investment's promotional schemes. However, Pheu Thai has promised only a corporate tax cut. No tax hike has been mentioned to make up for the revenue shortfall.
The corporate tax cut and a tax cut for first-time car and home buyers would set the treasury back about Bt100 billion in lost revenue, while firms might not be helped much by the corporate tax cut in reducing costs, due to the higher wages.
Pheu Thai believes the tax cut would actually boost tax collections, as the tax base would be enlarged. This remains to be seen.
Tax cuts would also result in a wider deficit for next fiscal year. And as the government has many populist policies to implement, such as cheap loans, cheap homes, cheap cars and free computer tablets, state expenditure would balloon. Combined with the budget for mega projects, the government runs the risk of triggering a fiscal crisis in the near future.
The government may have some money to spend for two years, as debt has not yet reached an alarming level. But after that, many economists doubt it will have money to spend. Currently, public debt is about 41 per cent of GDP. It would be dangerous if it shot up to 50 per cent of GDP.
The government presented a false premise to voters - low taxes but generous welfare. The US is now facing severe debt trouble due to its huge budget deficits. Many economists warn that the US runs the risk of defaulting on its debt. Greece has already been forced to implement an austerity programme in exchange for a bailout from its public debt crisis. Many countries in the eurozone are on the brink of crisis because the |governments have accumulated high debts.
TABLETS ARE "USELESS"
Academics do not agree with the Pheu Thai Party's "one tablet, one child" policy.
Some say it would be useless because tablets are only |hardware. Students would not learn anything without good software and academic content installed on them, while teachers do not know how to advise them to use the devices properly. Others say the tablets would be useless in rural areas especially where Internet coverage is not complete. Many see it as just a populist policy that helped the party win the election.
Another academic from Chulalongkorn University said personal tablets could make children become addicted to computer games and spend time with just themselves or a few friends.
Such a lifestyle would hinder children's physical and emotional development, he said.
Research shows most young children use computers for playing games and only 15 per cent use them as a learning tool. And research findings have confirmed that computer-game addiction was the reason behind so many dropouts.
He called on the government to choose the right age groups and train teachers on how to supervise their students' use of the tablets. Without careful planning, the handout would do more harm than good, he warned.
The policy promises to give a tablet to each Prathom 1 student. The devices could be bought from China or India for as little as Bt3,000-Bt5,000 apiece.
The party said it would start distributing the devices in January.
LANDBRIDGE NOT FEASIBLE, WHILE TOURISM SECTOR WOULD BE HIT HARD
The landbridge project in the South is not worth the investment. What the country stands to gain would be only long-term ground leases to foreign investors who will be granted investment privileges.
To make the project worthwhile, not only should the rail link between Pak Bara Port in Satun on the West Coast and Songkhla Port in Songkhla on the East Coast be constructed, but also an oil refinery, oil depot, oil pipeline and petrochemical plants, according to a study of Dubai World.
Another downside is that the tourism industry in the southernmost provinces would be adversely affected.
What she should do
CREDIT CARDS FOR FARMERS MAY WORK |BUT THE DEVIL IS IN THE DETAILS
The central bank has strict rules governing the credit card business to prevent runaway consumer debt that could threaten financial stability. Under the rules, cardholders must show income of at least Bt15,000 a month or Bt180,000 a year. Commercial banks can charge only up to 20 per cent in annual interest - including penalties for overdue payments.
Most of the 6.9 million farm households will not meet the central bank's criterion since average family income was Bt58,632 in the 2009-10 crop year.
However, state banks could lower the bar in order to accommodate farmers with business cards. The specialised financial institutions supervised by the Finance Ministry use different accounting practices from commercial banks.
Luck Wajananawat, president of the Bank for Agriculture and Agricultural Cooperatives (BAAC), said the credit card project could be implemented. Many people would agree with Pheu Thai that the cards could be used to store data on farm production. It could also be used for other purposes in the future, such as for records on cash handouts in time of economic crisis.
However, the crucial point is that Pheu Thai said the cardholders need not pay interest when they use the card. It is absurd and means the government will fully subsidise interest payments. The BAAC is unlikely to shoulder such a cost. Currently the bank charges about 7-per-cent interest on farm loans.
Easy credit could create a moral hazard, as farmers may not spend their credit carefully. The government will also need to allocate a budget to support this scheme besides the budget needed to support its price subsidy scheme for farm products.
Many developing and advanced economies have paid a high price in terms of economic and social crises stemming from easy credit policies. The government should proceed carefully.
ENERGY PRICES NEED RATIONALISATION
Pheu Thai shocked the energy market with its plan to abolish the Oil Fund. But its decision became palatable when it later decided also to end the Oil Fund levies on three products and to come up with other mechanisms to deal with energy prices in a broad picture.
Ending the fund would present problem, as it is in charge of moderating the prices of some products crucial for the masses like LPG and NGV. Yet, cutting the contributions from three products means the loss of only Bt120 million per day and it looks set to introduce other mechanisms. The fuel pricing formula will be changed to a lower ex-factory basis, which would eventually bring pump prices down. An oil reserve will be started and some petroleum concession royalties would be used to cover the subsidies.
But what the new government should really take into account is the fact that energy prices tend to move up, not down. A Thai Oil analysis shows that though oil prices will ease this year, they would remain above US$100 per barrel.
Subsidies must be scaled back so that energy is used at actual cost. Only then will real demand for alternative energy increase. Just remember that 90 per cent of energy consumed is imported to the tune over Bt1 trillion a year, or over 10 per cent of GDP. In the short term, it should also relieve all petrol users of all subsidies, if fairness is to be ensured.
ELECTRIC, HIGH-SPEED TRAINS AND DOUBLE-TRACK RAILWAYS TO IMPROVE LOGISITICS
Extending the mass transit system throughout Bangkok makes sense, especially the Blue Line (Bang Sue-Tha Phra and Bang Khae-Hua Lamphong sections) and Green Line (Bearing-Samut Prakan section). These extended lines will help connect with the existing two lines, BTS Skytrain and MRT subway, while the Red Line's Bang Sue-Taling Chan section and the Purple Line's Bang Yai-Bang Sue section are under construction.
These are projects that Pheu Thai should push ahead with to save energy and ease traffic congestion in the capital.
The government should also proceed with the high-speed train projects for both passengers and freight. Because of financing limitations, it should start with the priority rail routes or the routes that are most interesting to investors, such as the Bangkok-Korat-Khon Kaen-Nong Khai line. This route will connect with South China's high-speed railway, which will extend from Kunming via Vientiane in Laos to Thailand's Nong Khai. The property industry is most likely to experience a boom, especially in areas with stopover stations.
To reduce logistics costs, which amount to as much as almost 20 per cent of gross domestic product, the double-track rail routes are sorely needed. For the first phase, about six routes with a total length of 873 kilometres have been promised by Pheu Thai.