SSC 260 : Introduction to Social Sciences : Economic Section Jaruwan Chontanawat Topic 3: Economic force in Daily life (III) : Economic problems and Solutions 23/09/2008
Outlines: • Past – Bubble economy, inflation, Unemployment, exchange rate, etc. • Solution: Fiscal and Monetary policies, International policy – FTA, AFTA • Fact: Existence of various problems • Old solution • One alternative solution : sufficiency economy
Acknowledgement • Aj. Panalert Siriwong
Bubble Economy • Thailand had $90,000 million foreign dept (more than ½ of GDP) • Most of them were used out of the economic system (ex. stock market) • Result in high the percentage of economic growth • But, in fact, it had low level of development on economic structures.
The Bubble Burst • In 1996, Thai export growth rate was at 0% due to the lack of competitive advantages. • Thai Baht was depended on USD. • US economic was in the way up, • Thai was not. • Investor sold Baht back to the market.
Baht was sold back to market… Supply of Baht Price of Baht
End of the Bubble • Bank of Thailand try to buy Baht from the market until the reserved fund was run out. • Baht was floated, IMF loan.
Changing in Exchange Rate • Shift from 25 Baht/ 1 USD 40 Baht/ 1 USD
Inflation Solution • Cost push • Fiscal Policy • Demand pull • Monetary Policy
Fiscal Policy • Used by =Government • Tools= Government revenue (Taxes) and expenses • Objectives: • Efficiently resources management • Encourage income distribution. • Stimulate economic growth • Balance economic stability
Fiscal Policy as Economic Solution • Expansionary fiscal policy(combat deflation) • government expenses taxes • Contractionary fiscal policy(combat inflation) • government expenses taxes
Thai activities on fiscal policy • Expansionary fiscal policy • Encourage economic growth and balance economic stability • In 1961-1976 • Government spendingTaxes • Invest in economic infrastructure, public utility. • Reduce import taxes of some capital goods or production materials to reduce production costs.
Monetary Policy • Used by =Central bank • Tools=money flow and loans • Objectives: • Balance economic stability, • Encourage higher rate of employment, • Stimulate economic growth, • Control trade balance, • Encourage income distribution.
Fiscal Policy as Economic Solution • Contractionary monetary policy (combat inflation) • Bank of Thailand sell stock • Increase reserved fund = Decrease personal loan • Raise saving interest rates = People save • Expansionary monetary policy(combat deflation) • Bank of Thailand buy stock • Decrease reserved fund = release more personal loan • Reduce interest rates on bank loan = New business = Jobs • Reduce saving interest rates
Thai activities on monetary policy • Balance financial stability • Strengthen financial institution stability • Sell stock to private sector • Control loan pay out to private sector • Support economic and social development • Encourage commercial bank to increase loan to agricultural sector. • Provide financial support to agriculture and co-op bank.
International Economy • Different economic system • Free-market economic (Capitalism) • Command economic (Communism) • Mixed economic
Capitalism • Free decision making by individuals • People have rights to owned business and on profit they made • People can consume whatever they want • The price mechanism • Marketing as a key success • Government not involve on economic activity • Only monitor and control situation
Communism • Contrast to capitalism • Government occupy resources and all production factors • Private sector has no rights on production factors • Government control over all production processes and resources allocation • All business units and households produce and consume whatever government required.
Mixed economy • Combination of Capitalism and Communism • Government and private sector cooperate to solve basis economic problem • Production factor come from both government and private sector
Mixed economy • Capitalism ingredients • Private sector has rights on some assets and freedom to product or consume • Competitive oriented, price mechanism • Communism ingredients • Government operate on business unit that has high influence to majority of population i.e. Electric and water supply, and transportation
Baht Value • Internal Influence • Influenced by rate of inflation • Rate of inflation Baht Value • External Influence • Rate of exchange to other national currency (How much of Baht can buy 1 unit of other currency) EEF (Exchange Equalization Fund)which is a subdivision of the Bank of Thailand is responsible for Thai currency adjustment.
Thai’s currency adjustment methods • Fixed exchange rate method • Tied with U.S.Dollar fixed in a period of time. • Daily exchange rate method • Discuss with member from commercial bank and EEF concern Demand and Supply of U.S.Dollar • Exchange rate adjust by EEF • EEF adjust rate of exchange by moritoring Demand and Supply of U.S.Dollar • Money basket • Adjust by monitoring group of currency which are trading alliance of Thailand
Free Trade Area (FTA) • Thai’s current economic strategy • Trading agreement between 2 countries • WTO wasn’t benefit Thai trading agreement • Because too many member (145 countries)
Free Trade Area (FTA) • Thai’s main customer is U.S., Japan, and E.U. reached peak point = Thai tried to expand market to other region. • Thai open FTA to Bahrain = Open middle east market • Thai’s FTA with China encourage import value from $20m to $200m (10 times)
Free Trade Area (FTA) Current: Thai is negotiating for increasing FTA activities with… • China • India • Mexico • U.S. • Australia • E.U. • South Africa
AFTA: Asian Free Trade Area • An agreement by the Association of Southeast Asian Nations, of local manufacturing in all ASEAN countries. • consists of10 members; • Brunei • Indonesia • Malaysia • Philippines • Singapore • Thailand • Vietnam • Laos • Myanmar • Cambodia
Primary Goals • Increase Asian's competitive edge as a production base in the world market • The elimination of tariffs and non-tariff barriers • Attract more foreign direct investment to Asian
AFTA and Thai Economy • Expand Thai’s International Trade • Free trade among Asian encourage increasing in trading circulation • Exchange in production factors (raw material) • Lower cost for business • Create competitive advantage in east of Asia region • More investment from Japan and U.S.
AFTA and Thai Economy • High trading expansion between Thailand and other members in AFTA (1993-2003) • Thai export value • In 2003 = $80,049Million • In1993=$37,325Million • Thai import value • In 2003 = $75,015Million • In1993=$46,163 Million
AFTA and Thai Economy • Export • Asian becameThai’s no.1 export market replacing U.S. • Important export goods: Computer and equipments, automobile, chemical products, steels, and rubber. • Import • Asian became the 2nd market follow Japan market for Thailand import market. • Important export goods: Chemical products, electrical circuit, computer and equipments, raw gasoline, and natural gas.
China Economic Development • Mega-Projects Investment • Changing to capitalism
Current statistics • Economic growth • Inflation • Trade balance
Economic forecast for2007 Inflation Gas price decrease 06 = 4.7% 20 07 = 3.0-3.5% 20 Raw gasoline2006= $65/Barrel 2007= $60/Barrel GDP2006 = 4.5% 2007 = 4.0-5.0% Government’s fiscal policy
Trade balance+4,526million Baht New market were Eastern Europewith 94% increase, India, Africa, and South Korea at 22% Export goods had been increasing in all types of goods including agricultural and industrial agricultural products with28.8% increase Major agricultural and industrial agricultural products most had been increasing including; rice, cassava,food products (frozen, transform food;shrimp, chicken, fruit, and vegetable) and sugar
‘Fact’ ‘Basis of Thai economy is agricultural sector’
Thai major economic obstacles • Our prior main focus was to increase revenue and economic growth of “the country”
Result from the prior focus • National income was continuously increasing • SED-Plan 1-3 = 7-8% per year • SED-Plan 4 = 5-6%per year • SED-Plan 5 = 4-5%per year • A decade before economic crisis (SED-Plan 6-7) was a period that NI increased tremendously (8-9% per year and more than 10% in some year) • Refer as one of the countries that haddramatically high growth rate
Result from the prior focus • Problems of majority of population (most are poor in urban and country side) • Still not independent and weak, lack of opportunity to migrate for better living in the city • Poor, or sufficient only to lives day by day • Unemployed, or done illegal work i.e. prostitute, drug dealer • Gap between rich and poor getting wider
Result from the prior focus • Other problems… • National resources deficiency • Environmental problems • National and personal debts • Lack of competitiveness • Depend on export markets
Question: Where did the NI go? • It went toa few Thai millionaire+ Foreigner who was the capital holder (owned foreign technology, product, and services) • The consequence was that those people became richer and the gab also wider
Same old solution • Most of solution done through fiscal and monetary policy • Heavily stimulate economic by previous governments • Money input to economic system • Fiscal policy • Monetary policy • To stimulate government spending, private consumption, investment, and supporting export spending
Same old solution • Money input to economic system through fiscal and monetary policy was doing well to stimulate consumption, but… • Non-competitive producer still survived in the market • Highly supportedSMEsand OTOPbut lacked of products that were competitive and profitable • Many policy aimed at stimulating export market no matter that product were competitive or profitable • High value of export but still depended on import production factors
Same old solution • Same old solution was to use money as the solution to economic problem • But never fixed problem in the supplyside (production) which was the basis of the economy. And the main reasons might be either it was difficult to do so, or too difficult for the government and private sectors which resulted in many hidden agendas.
Problems in the Country Side • Populist project • Many poverty project • Eer-Ar-Torn projects • Help poor people? Or for short-term political benefits?
Problems in the City • Higher credit card debts due to easily card issued • Credit offerings for consumer were everywhere • Fully stimulate property investment to enlighten the business • Money flow from internal and external came into stock market due to low saving interest rate
Problems in the Nation • Prices of lands, houses and properties, and stocks were increasing • Consumerism • High purchasing of foreign luxury products, effected trade balance • Bubbles were created from many forces of market to stimulate high purchasing activities from all sectors of economic stakeholders
Stocks price went up but not the stock in the production sector which was the basis of the economy • Those were commercial bank, energy, communication, property, and entertainment business • But in production unit still remain the problem of the ability to be“profitability” and“productivity”
Basic wage was not increased • New graduates still out of job • Majority of people had not benefited from the recent economic growth
Living with debt ? • 84% of population had higher expense than income earning due to the increasing of … • price of goods • interest • gas price • What did they do? • Sell personal stuffs • Create debt (lend from their relatives) • Withdraw their saving • Average debt/household is 134,190 Baht per household (Average20,000Baht increasing/household) • Formal debt73.9% • Informal debt26.1% • Research found that 55.2% of the samples had debt payout problem ผลสำรวจกลุ่มตัวอย่าง 1,187 ทั่วประเทศของ ศูนย์พยากรณ์เศรษฐกิจและธุรกิจ มหาวิทยาลัยหอการค้าไทย