It took Japan 17 years to learn that a macroeconomic policy is for stabilising an economy, not stimulating growth. Due to low economic growth in the "lost decade" following the financial crisis in the autumn of 1997, the Bank of Japan adopted an unthinkable monetary policy of a negative interest rate in 2007 by pushing the short-term policy rate down to -0.1%.
The government of Japan was also in the game of stimulating the sleepy economy by running high levels of government deficits. Intense fiscal policy raised government debt to GDP by 79%, from 173% in 2007 to 252% in 2023.
The result was a total failure. One might think extreme monetary-fiscal policies would have energised Japan's economic growth to beyond 5%. The fact is the opposite. Average GDP growth for the 17-year period was a measly 0.38%.
Theoretically, the purpose of a macroeconomic policy is to prevent an economy from undesirable inflation, chronic current account deficits, and high levels of unemployment so as to foster economic growth, on which wealth and improved living standards depend. Sustainable growth must come from increased production volume and value, not from a macroeconomic policy push.
The golden rule of economic management is that a macroeconomic policy is for solving macroeconomic problems, while a structural change policy is for raising the production value of the economy. If one wants economic growth, one goes for a structural change policy. If one wants economic stability, one goes for a macroeconomic one.
After 17 years of error, the Bank of Japan changed the direction of its monetary policy by raising the short-term policy rate from -0.1% to 0.0-0.1% on Tuesday. Concurrently, Japan's government has also re-targeted growth through the structural change policy of AI chip production. Time will tell whether the Japanese government will restrain the habit of running fiscal deficits. However, without a carte blache from the Bank of Japan to print an indefinite amount of money, the Japanese government has no choice but to seriously think about the adverse effects of deficit financing.
Japan has learnt an expensive lesson. How about Thailand? The government is still obsessed with asking the Bank of Thailand to lower its policy rate and dreaming about a big fiscal push with the digital wallet scheme. Will it take Thailand 17 years to learn the mistake that a macroeconomic policy is not the path for growth?
Fortunately, I do not have to worry about such mistakes. First, it is unlikely the Bank of Thailand would yield to the government's demand to lower interest rates. Second, a lack of excess liquidity to support the 500 billion baht digital wallet scheme would make the scheme impossible, whether through the Emergency Borrowing Act or the 2025 fiscal budget.
Thailand's economic problems arose from structural flaws, not from an unsupportive macroeconomic policy. Key structural flaws are (1) the low value-added manufacturing sector and tourism sector, (2) a desire for a higher standard of living than income can support, and (3) increased competition from abroad.
The production system yields an income of about US$5,000 (180,470 baht) per capita per year. Instead of going for high value-added products from heavy industry and high-tech industry, the economy concentrates on middle value-added products. Some 20% of our production is in the food and beverage category. Even our automotive industry is an assembling business, not building vehicles from the ground up with homegrown technology. If a country does not move to higher value-added products, it is difficult to see sustainable GDP growth.
The second structural flaw is that consumers are not satisfied with $5,000 per capita income. Thais want to consume much, much more. The only way to supplement earned income is by heavy borrowing. The desire for a higher standard of living caused household debt to GDP to rise from 43.5% two decades ago to 78.6% a decade ago and to 90.9% nowadays. It could be concluded that Thailand's two decades of growth came from debt, not income.
The tourism boom was not exactly a game changer. According to my own estimation, the tourism industry's value-added is about $6,000 -- not enough to satisfy consumer's desire to spend. Despite 40 million tourists spending the equivalent of 12% of GDP in 2019, households still had to borrow more to supplement their income. Household loan growth averaged 5.5% that year.
While Thailand is distracted by a booming tourism industry, the manufacturing sector has been suffering, and no government has addressed this. The Manufacturing Production Index (MPI) was 105.5 in 2018 and plummeted to 98.5 in 2023 -- an alarming 7.1% decline in five years! This could be the very reason why Thai GDP growth is consistently lower than key Asean nations.
What might be the cause of the deterioration in the Thai manufacturing sector? I will not make any conclusions here but, some information to consider: Imports from China rose from 9.3% of GDP in 2019 to 13.8% of GDP in 2023. The quick rise in Chinese imports widened trade deficits from 673 billion baht to 1.3 trillion baht during that period. The trade deficit with China increased to 1.62 billion baht in January, pointing to a possible 1.94 trillion baht deficit this year. With cheap and better products from China, why should Thais bother with expensive "Made in Thailand" products?
An inflow of cheap imports might be the main cause of a negative inflation rate. Domestic consumption is not weak and, thus, cannot put downward pressure on prices. On the contrary, private consumption increased by 6.2% in 2022 and 7.1% in 2023. Could it be that regularly priced domestic products might be replaced by much lower-priced imports?
With (1) low-value-added manufacturing products, (2) a low-value-added tourism industry, and (3) a non-competitive manufacturing sector, it is no surprise that all economic research houses revised their GDP growth projections for 2024 downward by about 0.5%. The downward revision is not something unusual. But to revise projections downward at the beginning of the year is not usual. One of the research houses, SCB EIC, said the downward revision was due to lower economic potential. Thai economic potential slid from 3.4% in pre-Covid years to 2.7% at present.
Before I end this article, I have a piece of important data to reveal. Tourist spending is now much lower, 44% lower to be exact, than in pre-Covid years. It used to be 45,700 baht per tourist in Q3/2019 and was 31,730 baht in Q3/2023. Tourist authorities, please do not argue that the agencies have different numbers. My numbers are derived from the balance of payments, not from surveys. Reduced spending means a reduced impact on GDP, and economic research houses might need to revise Thai GDP growth downward (again) soon.
It is clear that Thailand's economic problems are structural. Under this assumption, lower interest rates and fiscal stimulus packages could be counter-productive and should be considered as social programmes rather than economic ones. My advice is that the government and the Bank of Thailand should refrain from making policy mistakes like Japan.