Hiked wages could ease current slump
published : 24 Feb 2022 at 04:00
newspaper section: Oped
Before getting to the main story of raising wages, I have a point of concern to raise. That is the unusual movement of Thai baht exchange rates. Theoretically, this is the time the baht should be depreciating because of rising current account deficits due to the high prices of imported oil.
Thailand is paying about US$3 billion (97 billion baht) extra per month, compared to the same period last year, for fuel imports. But instead of depreciating, the baht has appreciated 2.8% against the greenback and 2.0% against the Japanese yen since the beginning of this year. The only logical explanation is that the Bank of Thailand has been intervening in the foreign exchange markets.
To achieve such levels of currency appreciation, the central bank might have sacrificed its international reserve. From Jan 1 to Feb 11 (the latest data available), some $3.073 billion of reserves could have been lost due to market intervention.
Why? I can only guess. Maybe the goal was to keep domestic fuel prices, which is a multiplication of global oil prices and the exchange rate of the baht, lower than they should be. If so, such a move was too dangerous. Sooner or later, currency speculators will spot such non-market movement (as I do) and begin to speculate on the baht. When the situation is ripe (for speculators), Thailand could see a currency attack similar to what happened in 1997.
And now on to the main story of raising wages.
This year will be known as the year of supply shortages. Let me quote Jeff Currie, global head of commodities research at Goldman Sachs, who made the following remark this past Valentine's Day.
"I've been doing this for 30 years and I've never seen markets like this," he said. "We are out of everything. I don't care if it's oil, gas, coal, copper or aluminium. You name it, we are out of it."
I don't think a comment like this from a person of such stature can be ignored. At least, I am certain that oil prices will rise again this coming summer, with or without the impending Russia-Ukraine war. This is because of the lower supply of shale oil in the United States.
The United States is the world's largest producer of oil (11.3 million barrels per day), accounting for 15% of the world's oil supply. Some 65% of that comes from shale oil. So here is the problem. To extract crude oil from oil shale rock, one needs frac sand (a type of sand with small, uniform particles). There is a severe shortage of this at present, which has caused its price to rise by two or three times. By the summer, it is expected that the supply of shale oil might be cut due to inadequate amounts of frac sand. At the same time, summer is the peak time for oil demand. More demand and less supply are a sure condition for a price hike.
With a depleting supply of global commodities and rising demand amid the recovery from the Covid-19 pandemic, it is almost certain that inflation is likely to remain high this year, especially with the threat from the shale oil shock. The outlook for the world economy might not be as bright as the GDP growth forecast of 4.4% issued by the International Monetary Fund (IMF).
Worst of all, inflationary pressures could prompt the world's major central banks to raise interest rates faster than expected. Even the Bank of Japan might not be able to avoid raising interest rates as Japanese yen has already lost almost 10% of its value in one year.
What should Thailand be doing in the midst of (1) high product prices, (2) high interest rates, (3) high government debt, and (4) high household debt? The answer is "raise wages".
But don't knit your eyebrows together just yet. Please hear me out first.
What kind of advice would we expect from orthodox, especially Keynesian, economists given such a situation where all four aforementioned factors are in play? They would advise the government to prevent the economy from contracting by running huge deficits -- in other words, a "borrow-and-spend" strategy.
The problem is the Thai government is already mired in debt. To borrow even more could lead to long-term instability as witnessed in many countries in Latin America. Once a country falls into the debt trap, it is almost impossible to get out of it. Given the current level of government debt in Thailand is close to 9 trillion baht, it would take 90 years to repay it all -- assuming the government is running budget surpluses of 100 billion baht per year.
Moreover, without the Bank of Thailand printing money to buy government bonds, more debt would surely drive up domestic interest rates. The cost of printing money is inflation. Now you understand why the US has the highest inflation rate (7.5%) among developing countries.
Instead of the government leading economic recovery through this borrow-and-spend strategy, why not let the private sector lead the way through more personal consumption and business expansion? Instead of increasing government spending, why not let the private sector spend more from its rising income?
This could be accomplished by increasing domestic wages. Opponents of this strategy fret about the nation losing its competitiveness, which could lead to investors moving factories to "cheaper" wage countries, while higher wages will trigger higher inflation -- the classic wage-price spiral.
While higher wages leading to higher inflation is theoretically correct, ramped-up government spending also leads to higher inflation. If the government were to spend 100 billion baht, it would have the same impact on price levels as if workers had spent 100 billion baht. This argument is pointless as it simply boils down to a choice between the lesser of two evils.
Actually, one can never tie wages to inflation, as higher wages do not necessarily translate into higher inflation. Japan's minimum wage is six times higher than that of Thailand. But Japan has consistently seen much lower inflation than Thailand.
The loss of international competitiveness is a more valid argument. However, this can be compensated by the depreciating exchange rate. In the case of Thailand, a 20% rise in worker's compensation would cause a 6% loss in international competitiveness. If the Bank of Thailand were to depreciate the currency by 2 baht per dollar, Thailand's international competitiveness would be fully restored.
By the way, wages have nothing to do with competitiveness. Chinese workers earn 30% more than their Thai counterparts. Yet China's system of production is far more competitive.
Proponents of increased wages should study the case of China to better understand the impact on a nation's competitiveness.
Based on the GDP-by-income provided by the National Economic and Social Development Board (NESDB), a 20% rise in worker's compensation would put an extra 862 billion baht in worker's wallets, and should push GDP growth by a further 5.5%. The counter-measure would be to depreciate the currency by 2 baht to about 34.5–35 baht per greenback.
Is this an interesting alternative to the government's current borrow-and-spend strategy?
Chartchai Parasuk, PhD, is a freelance economist.
- minimum wage