Department stores throughout Thailand have launched major end-of-year sales to attract consumers. The Finance Ministry and Bank of Thailand are confident that in the 2005 economy will continue to grow, projecting expansion of around 6%.

Improved fiscal position gives more leeway

ONE OF the strongest indicators of the resurgence of the Thai economy has been in the country's fiscal accounts.

Fiscal 2005 calls for spending of 1.2 trillion baht, the largest budget in the country's history. But notably, the budget also projects a balanced position, the first since the 1997 economic crisis and two full years ahead of schedule.

Fiscal targets also remain relatively conservative, with the public debt expected to fall from 45% of gross domestic product to no more than 36% by 2008, based on estimates of economic growth of 6-7% per year.
Tax revenues have soared well ahead of target, thanks in part to higher corporate, value-added and personal income tax revenues due to economic growth. Initiatives to expand the tax base and introduce information technology in managing tax collections have also played a key role in adding to the public purse.
The added revenues has helped the government better tailor fiscal policies to support strategic growth initiatives. In 2004, authorities announced a range of tax incentives aimed at supporting small- and medium-sized businesses, reducing manufacturing costs, promoting research and development and encouraging long-term savings.

Cynics might argue that the tax cuts have been carefully targeted to maximise the Thai Rak Thai government's popularity heading into the general election, particularly among the lower-income rural groups that form the bulk of the party's base outside of Bangkok.

A more reasoned argument might be that the tax cuts are aimed at increasing disposable income and supporting domestic consumption to help prop up overall economic growth, through initiatives such as raising deductions for individual taxpayers, offering new deductions for taxpayers caring for their parents or allowing civil servants to access death benefits that had previously only gone to their beneficiaries.

In October, the Finance Ministry announced that it would increase the deduction for individuals to waive taxes for the first 100,000 baht in income, an increase of 20,000 baht from the previous deduction and a measure expected to cost the government 1.92 billion baht in foregone taxes each year.

Small businesses, with capital of less than five million baht, will now pay taxes of just 15% for the first one million baht in profits, down from 20% previously, a change that will result in 5.63 billion baht in foregone tax revenues. Small businesses also received a separate benefit through an increase in the minimum revenue level for mandatory participation in the value-added tax system, from 1.2 million to 1.8 million baht starting in 2005.

Two other proposed tax changes, to increase deductions on regular income and to further ease the tax burden for small businesses, were stalled by the Finance Ministry late in 2004 over growing concern about economic prospects entering into 2005.

Excise taxes also underwent changes in 2004, most evident in a revamp of the auto tax system. Tax rates for small-engine cars were cut, while taxes for Thailand's all-important pickup industry remained at favourably low rates. The net impact of the changes was that auto tax collections in October fell 14% from 2003, despite the fact that sales increased by 5.58% over the period.
The improved fiscal environment also gave policymakers room to spend 16.5 billion baht on salary increases for the civil service.

_ WICHIT CHANTANUSORNSIRI

Policy Committee also began raising rates in the second half of 2004, with the committee in October increasing the 14-day repurchase rate to 1.75% in light of growing inflationary pressures and to maintain parity with international rates.

In the currency markets, the massive US trade and current account deficits finally prompted traders to sell off the greenback, leading to the euro reaching new highs of $1.32 and the Japanese yen climbing to 105 to the dollar by the end of the year.

Analysts say the dollar's weakness also reflects suspicions that the US government has reversed its long-standing policies favouring a strong currency to help address its trade deficit problem as well as pressure China to liberalise its own currency regime.

But China has remained coy on any changes for the yuan, as authorities want to clean up the country's debt-ridden banking sector before currency changes. US pressure remains on its largest trading partner, particularly as exporters fret about Chinese competitors benefiting from an artificially undervalued yuan.
Thailand, along with other Asian countries, will no doubt continue to intervene in the currency markets to maintain the stability of their currencies against the US dollar until the Chinese decide to adopt a change.
But with investors viewing baht appreciation as nearly inevitable, speculative capital flows have risen, leading to greater volatility in the capital markets.

For 2005, the central bank has indicated that monetary policy would possibly shift towards ensuring growth rather than focusing solely on price stability, an acknowledgement of the uncertainties to growth prospects ahead.

On the fiscal side, the 1.2-trillion-baht 2005 fiscal budget represents the first balanced budget since the 1997 crisis, and has given policymakers room to cut tax rates to support strategic development initiatives, such as policies to encourage research and development spending, support small businesses and build up long-term retirement savings.
Policymakers have pledged to maintain a conservative fiscal stance and continue to cut public debt levels to help strengthen the economy's base and credibility. At the same time, some 1.5-trillion-baht in new infrastructure investments have been proposed to strengthen the country's roads, ports and rail networks, although how the projects will be funded remains a large question.
Authorities have also pledged to increase their attention on medium-term reforms to raise industrial competitiveness and the value-added component for exports, as well as upgrade the country's labour skills and science and technology base through educational reforms.

Odds heavy for more of the same

]Its stated agenda may be populist, but the main outcome of Thaksinomics has been to increase the concentration of wealth among special interest groups and the government

WITH THE odds heavily in favour of the Thai Rak Thai party winning a parliamentary majority in the next election, it's quite clear that over the next four years, Thailand's economy is fated to become both more capitalist and more liberalised.

Fiscal policy stimulus measures will continue under a Thai Rak Thai government, while we can expect to see more bilateral free-trade agreements signed. Negotiations with Japan, the US and Peru are underway, adding to a list of countries that already includes China, India, Bahrain and Australia.

Special interest groups and businesses with close relations to the administration will no doubt benefit the most, just as they have gained from the agreements with India, China and Australia.

The administration's proposed megaprojects aimed at improving the country's water and transport infrastructure, at an estimated cost of 1.9 trillion baht over the next four years, will be worth the money if they are done transparently and efficiently. Such investments would help improve the country's logistics system and boost competitiveness in the world market.

On the other hand, if the projects are subject to heavy-handed political interference, the huge budgets to be raised through various methods such as asset securitisiation and new government bond issues could end up being siphoned off by well-connected individuals and politicians.

Despite its stated populist agenda, under Thaksinomics, the main outcome of government policy has been to increase the concentration of wealth among special interest groups and the government, with a widening gap between the rich and poor.

Another reality is that many institutions within Thai society such as local community groups and academia have seen their roles weakened due to state intervention.

Thai Rak Thai's new policy initiatives, such as the establishment of the Special Purpose Vehicle (SPV) initiative aimed at assisting farmers in improving their marketing and processing methods, access to capital, the transfer of farm debts to the Farm Rehabilitation Fund and the establishment of the new SML Funds for developing community projects, offer only minor variations on the same theme as the other populist policies undertaken over the past four years.

These policies will serve only to weaken the poor, rural communities and farm institutions by encouraging them to depend more on state assistance. The government may very well achieve its short-term political goals, but the policies will do little to address the fundamental problems faced by farmers.

Policies to strengthen their competitiveness or ensure the sustainable development of agricultural institutions and local communities remain lacking. Once these state-funded programmes end, the structural problems faced by farmers and the poor will remain. Creating sustainable development takes time, genuine commitment and the full participation of all stakeholders.

Unfortunately for Thai voters, TRT's rivals, whether the Democrats or the Mahachon Party, offer no significant alternative. Their own policies are by and large no more than a carbon copy of Thai Rak Thai's, as is the case regarding the issue of farm debt restructuring and free education for all.

It is natural that a political party will try to tailor its policies to attract the largest number of voters. After all, the main purpose of any party is to win elections, more so than to ensure the feasibility of its projects. The Democrat and Mahachon parties may need to propose different policies if they want to attract more voters or position themselves as a viable alternative to the incumbents.

I do not have much confidence in Thai political parties due to their indifference to their own policy platforms.
Personally, I vote for good politicians, and place more value on their personal character rather than their party affiliation, because I believe that good people at least offer the faint hope that they can lead to positive, long-term changes in Thai politics and Thai society.

Save for the 1997 constitution, no Thai government has sought to strengthen the power of the people or to promote economic and social justice. Quite the opposite _ politicians have tended to say one thing before the election but do the opposite once in power.

Power distorts, and the strength and independence of public institutions has weakened. But since there are few alternatives, society should continue the fight to create a better mechanism. The strength to change and create a better political system, support academic and media independence and promote democracy must continue.

The Thai people must help to support democracy and fair competition. It is important to vote for good people, as they will be the basis for creating a better society.

Dr Nipon Poapongsakorn is an economist with Thammasat University and a senior consultant with the Thailand Development Research Institute.

The new one-day clearance centre, which was established early in November at the Port Authority of Thailand headquarters, could help save 10 billion baht worth of expenses per day for businesses, according to Finance Minister Somkid Jatusripitak.

Revving up speed to market

After a decade of neglect, the government is finally getting serious about the need
to improve the current abysmal state of the country's logistics systems

WICHIT CHANTANUSORNSIRI And WORANUJ MANEERUNGSEE

CALL IT the price of economic development. Crowded roads, overflowing container depots, lengthy queues at customs points _ Thailand's aging transport infrastructure is now strained to full capacity, the price of years of delayed state investment and poor planning over the past decade.

Improving and streamlining the country's logistics and transport networks has taken centre stage among a raft of government policies aimed at boosting Thailand's medium-term competitiveness.
According to the Finance Ministry, logistics costs in Thailand amount to as much as 25-30% of gross domestic product, or up to triple those of developed countries.

Under a programme developed under the auspices of National Economic and Social Development Board, logistics costs are expected to be cut to 10% of GDP by 2010, with processing time slashed in half through regulatory streamlining and the use of information technology to expedite shipments throughout the supply chain.

Policymakers as a result have already begun planning to invest hundreds of billions of baht in new roads, ports and rail systems to relieve existing jams and support future growth. Bureaucratic red tape will also be cut to improve delivery times and reduce expenses.

One of the first initiatives under the new logistics strategy came in late 2004, through a new co-operative agreement between the Customs Department and the Port Authority of Thailand.
Both agencies adopted the ambitious goal of cutting clearance times for imports and exports to just 24 hours, compared with the average seven-day wait previously.

The reduction in delays translates into savings for the private sector of a massive 10 billion baht per day, according to Finance Minister Somkid Jatusripitak.

For surface transport, including marine shipments, the national strategy will focus on four different strategies:
FPosition the country's ports as an international gateway to the region;
FAdopt a hub-and-spoke model for domestic shipments by developing the country's container yards and truck terminals;
FShift transport duties from trucks to trains and water transport. Develop national pipeline networks for the shipment of petrochemicals and gas;
FEstablish a national logistics committee to serve as a central co-ordinating body and implement any necessary legal reforms.

The air cargo sector, led by state agencies such as Thai Airways International, Airports of Thailand, the Aeronautical Radio of Thailand and Thailand Post, will undertake similar reforms, with the aim of positioning the country as a world-class air cargo centre, particularly for goods such as food, fruits, vegetables, electronics and auto parts.

Initial steps under the policy will focus on upgrading the country's railways, expanding air routes to overseas markets and stepping up freight charters under Thai Airways. Policymakers also want to rethink each step of the supply chain to improve delivery times and cut down on unnecessary delays.

Early targets include cutting aircraft loading times for cargo down to two hours from three; reducing vessel loading times to 18 hours from 24 and cutting fuel expenses for marine transport.

A preliminary budget of 99.7 billion baht has already been approved through 2008 for logistics improvements by the SRT, PAT, Thai Airways, AOT and Aeronautical Radio of Thailand, to be financed through investment budgets of each state enterprise, the fiscal budget and the private sector.

Business leaders say they certainly welcome any effort to reduce transport costs and improve delivery times.
Globalisation has led to increased competition, more sophisticated and demanding consumers and shorter product life cycles.

Manufacturers and parts producers alike are facing increased demands based not only on economies of scale, but economies of speed, where time-to-market becomes as important _ or even more so _ than price and product features.

Suchart Chantaranakaracha, vice-chairman of the Thai National Shippers' Council, notes that Thailand can no longer depend on low labour costs as a competitive advantage in world markets.
Exporters need to improve their technology, beef up production efficiency and human resources while altering market strategies to survive in the future.

Mr Suchart, a garment exporter, said the garment and textile industry offered a prime example of how global market changes were putting pressure on companies to change their operations.

Starting in 2005, textile exporters the world over will face new challenges due to the expiration of multilateral agreements on quotas.

China, with its fast-growing industrial base and huge pool of low-cost, skilled labour, looked to be one of the biggest beneficiaries of more liberal global markets.

"Manufacturers need to improve their quality and service, offer punctual delivery and respond to customers by adopting a service-based mindset to survive," Mr Suchart said, adding that by 2007, over half of the world's garments could end up carrying the "Made in China" label.

Ruth Banomyong, a lecturer on international business and logistics at Thammasat University, echoed agreement with Mr Suchart, adding that the government should place a greater focus on developing information technology and supply chain management systems.

"Whether they like it or not, Thai exporters have to adjust themselves to fit the new business paradigm. Major global buyers like Wal-Mart not only strictly control their supply chain, they also control their suppliers," Mr Ruth said.

Boosting competitiveness

Little progress has been made by the current administration towards
levelling the playing field _ but plans are in the offing

Chatrudee Theparat

DESPITE CONSIDERABLE improvements in past decades, the government's determination to boost the country's overall competitiveness and improve the local investment climate has been flagging in recent years. The real challenge for the next administration _ whoever it might be _ will be to push forward and effectively implement the state's existing competitiveness plans for which the groundwork has already been laid.

A recent World Bank survey examined ease of investment in 145 developing and developed countries based on such basic factors as ease of starting a business, hiring and firing workers and enforcing contracts. Although Thailand ranked 20th, it was one of only two developing countries held up as examples of favourable investment destinations.

But in terms of competitiveness, the World Economic Forum has lowered the kingdom's ranking to 34th in 2004 _ a slight drop from 32nd in 2003 _ out of 140 countries in the survey. Thailand's competitiveness rating fell in all sectors, including technology, which dropped to 43rd from 39th. On regulations and government management, the country's ranking fell to 45th from 39th, while at the same time private sector competitiveness was 37th, down from 31st.

However, the International Institute for Management Development (IMD) has upgraded Thailand's competitiveness ranking to 29th from 30th among 60 countries in the region. But the IMD also lowered the government's efficiency ranking to 20th from 18th, also putting infrastructure at 50th from 49th.

Wilaiporn Liwgasemsan, the deputy secretary-general of the National Economic and Social Development Board, said the ranking slides were clear warnings for both government and the private sector. Serious problems still exist, she said, adding that solutions for improving Thailand's competitiveness are sorely needed since they put the country at risk of missing out on future growth.

Although the government has shown concern about the issue by introducing various initiatives and plans for competitiveness development, one expert said that problems related to their implementation had prevented them from bearing fruit.

"Some projects, such as the fashion hub scheme, deviated from the original plan with the result being a huge waste of the state budget," she said.

"Worse yet, many projects have been approved with the supposed intention of increasing competitiveness, but in reality, they have nothing to do with it at all, as shown by the flurry of infrastructure projects approved at mobile cabinet meetings."

Ms Wilaiporn said that progress had been slow in many areas of proposed reform such as education, human resources development and agriculture restructuring, even though those plans have been gathering dust for years.

Next year, the government would emphasise the role of industrial institutes in assisting manufacturers in improving productivity.

Government supported, such institutes oversee industrial development in the fields of jewellery, food and automobile manufacturing. A new national productivity institute would provide benchmarks for all industries to work towards achieving.

On the industrial cluster development plan, the NESDB would seek co-operation from successful clusters, and ask that they disseminate their knowledge of business operations to other clusters making less progress.

Current clusters include ones for ceramics in Lampang, motorcycles in the East, shrimp in Nakhon Si Thammarat, organic vegetables in Nakhon Pathom, multimedia in Bangkok and tourism in the North.
One significant improvement in 2005 will be a massive injection of state funds into improving the local logistics system, with agencies busy working out implementation plans scheduled to be approved by the cabinet soon.

Plans to be implemented next year involve five major changes such as legal amendments to facilitate the linkage of existing transport systems, the establishment of just-in-time service for exporters, more efficient container management, a limitation on 10-wheel truck loads and the implementation of a single-window entry system for imports and exports.

Ms Wilaiporn said restructuring container management at Laem Chabang deep seaport alone would save the country 1.8 billion baht a year, since currently half of all transport costs are for moving empty containers.
A survey showed that logistics and energy costs respectively accounted for some 52% and 29% of inventory expenses, with the rest coming from warehouse management.

The cabinet has already approved in principle a plan putting the logistics issue on the national agenda, complete with a goal of slashing overall costs by at least half over the next five years.