Thailand without the baht

“Thailand without the baht” is a useful way of thinking about the Irish economy’s boom, bust, and subsequent flat-lining, so it’s great to see that Paul Krugman is about to get his teeth stuck into the Asia-Euro comparison.

Some people argued in 1997/1998 that the crisis showed that the entire East Asian growth model was flawed. Whatever the benefits or costs of that model may have been, the subsequent rebound showed that these economies were still capable of delivering long run growth once their short run macro problems had been resolved. Seen from the inside the Irish growth model seems pretty rickety, but respectable if unexciting growth rates of the sort you see in countries close to the technological frontier should be attainable in the future once our own short run macro problems, and those of the Eurozone as a whole, have been resolved. Unfortunately this doesn’t seem to be on the horizon right now, which is why the “default and devalue” scenario has to be an option now in Greece, and may eventually come onto the policy agenda in other Eurozone periphery countries as well. The problem with the “short run” is that it can continue for an awfully long time unless corrective action is taken.

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14 thoughts on “Thailand without the baht”

  1. “The entire East Asian growth model was flawed.”

    Any economic ‘model’ which is embedded in the Permagrowth paradigm – is axiomatically, flawed. It takes time (decades) for this to appear, and when it does, few believe it. Like now!

    “The subsequent rebound put a stop to such arguments: these economies were still capable of delivering long run growth once their short run macro problems had been resolved.”

    ‘Dead Cat’ bounces are common enough events. Fools lots of folk.

    ‘Long-run growth’ is a physical impossibility in a closed system (our world). The math refutes it. Commodity limits refutes it. The demographics refutes it. Humans, on the other hand, and with great sentimentality – believe it! Or want to believe it! Sentimentality always triumphs over the truth.

    Economics is desperately in need of a ‘new’ model. And it will not be found by persistently searching in the same place, exactly where it is not located.

    “Default and devalue”. Is there a differ? Unless, and until the debt overburdens are dumped the social and economic wellbeing of millions will be compromised further. Dumping the debt now will be very bad (politically). Dumping later might be worse (?). Then its the turn of the politicians, and they seem quite prepared to pull a Samson Option rather than restructure.

    “The problem with the “short run” is that it can continue for an awfully long time.” Nicely put. Yogi Berra?

    Moral: ‘100% of nothing is greater than 10% of something!’

  2. wee bit off thread … but worth reading

    War in Syria:
    Where are all the intellectuals?
    29 August 2013 NRC Handelsblad Amsterdam

    In the past, writers, philosophers and other western thinkers mobilised to demand their governments act – or not – during international crises. Why are they so silent about Syria, as the conflict escalates and the prospect of military intervention looms? Excerpts.

    http://www.presseurop.eu/en/content/article/4097511-where-are-all-intellectuals

    imho, so-called western intervention now will destroy Lebanon … again.

  3. David, you are a tad naughty – going ‘off thread like that! However.

    Mark! where his carnage and his conquests cease!
    He makes a solitude, and calls it – peace!

    [Lord Byron: Bride of Abydos. Canto The Second: XX:67-68]

  4. Thailand had a lot of catching up to do. It still does.
    Ireland more or less caught up.

    I was by the seaside in Ireland this summer and comparing what our kids have to what we had and it’s a big difference. The houses are better, there are so many dining options for those with the means, the supermarkets sell wine, swimmers are in wetsuits, the town has a swimming pool for punters if it’s raining, the imperial supply chain is in Penneys, etc.

    We were in Thailand a few years ago and it’s a good bit behind.

    I dunno where the growth is going to come from unless the regime becomes creative and starts looking at things Ireland can do better than anywhere else.
    But what are the chances of that happening ?

  5. Maybe Asia has some lessons for struggling European economies and no poor country has become rich in recent decades without becoming export engines through attracting foreign investment. However, there is not much in common between Asia and Europe.

    Prof. Michael Spence’s Commission on Growth & Development has said that since 1950, 13 economies have grown at an average rate of 7% a year or more for 25 years or longer. At that pace of expansion, an economy almost doubles in size every decade.

    Growth of 7% a year, sustained over 25 years, was unheard of before the latter half of the 20th century. It is possible only because the world economy is now more open and integrated. Each and every one of these growth miracles had an export sector as a driver of growth and an increasing share of trade in GDP. There are no exceptions.

    High-growth economies typically set aside a formidable share of their income: a national saving rate of 20–25% or higher, is not unusual and the commission said it was preferable to capital inflows.

    These countries are: Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.

    Asian countries on the rise have always had frontier economies to provide very cheap labour e.g from Myanmar, Nepal and in Malaysia, migrants from Indonesia with a common Malay language and culture, work in construction and on palm oil plantations.

    While public social spending as a ratio of GDP ranges from 22% in Greece to 33% in France, it is in low single digits in most Asian countries: health spending is about 2.7% in China, Thailand and Malaysia. It is 1.1% in India.

    Despite labour laws, employers in Asia tend to have a lot of discretion; I was talking this week to a mid-level manger at a manufacturing plant in China and he explained that he had been six months in the job and had worked 7 days of every week in that period.

    Thailand and Ireland have been successful in attracting foreign direct investment (FDI) in contrast with Greece, which has a poor record compared with its regional neighbours.

    Cars are Thailand’s second-biggest export after electronics, and until the collapse of the baht in 1997/98, production by 12 multinational firms was mainly for the domestic market. However, it was not just a lower valued currency that did the trick. Many Thai car parts manufacturers were wiped out and the government introduced laws to promote exports.

    Most Thai’s were able to survive on the bountiful supply of rice and fish while workers had no leverage to force compensation for higher import prices.

    Devaluation against sterling could help Ireland’s small exporting indigenous sector if it was possible to contain inflation. However, it would hardly trigger a surge in FDI when emerging markets will continue to be the locations of the highest growth.

    The trade-weighted fall in sterling of up to 25% since 2007, shows that an economy needs to have things to sell in markets where there is demand; the same applies to Greece. India has 10% inflation and while the rupee has fallen 23% since May, it has a poor product mix and a trade deficit with 80 countries. It also as an overall goods and services deficit. India has a huge deficit with China at over 4 times its exports.

    The big issue here in checking the validity of comparisons is to disentangle the impact of surging growth in China on Asia (it’s evident in Australia and the negative effect of the rising Aussie on manufacturing) on commodities and global supply chains. There has also been the ability of Asian countries to keep their currency values low to build up reserves.

    Meanwhile, according to Franz Nauschnigg, an economist at the Austrian National Bank, “until 2004, the PIIGS’ (Portugal, Italy, Ireland, Greece, and Spain) biggest trade and services deficits were with the rest of the Eurozone. But in 2005, their combined deficit with the rest of the world, at €37.2bn, exceeded their combined deficit with other euro members by more than €4bn. Then, in 2008, before the worst of the global financial crisis hit, the PIIGS’ global deficit reached a record-high €116.5bn, of which €34.8bn was with China, surpassing their deficit with Germany for the first time – by more than €2bn.”

    Path to prosperity in Asia remains via manufacturing

  6. @ MH: “Path to prosperity in Asia remains via manufacturing.”

    Manufacturing, AND selling as much of your stuff abroad as you can, then repatriating the economic surplus. That does work, but only if the few are engaged in the productive enterprises and the majority are consumers of the capital goods, services, etc. being exported. It does not work in reverse – which is what is now happening. Well, yes it can – for a while, but the non-productive folk need to have flexible, and expanding, lines of credit. And we now know the unfortunate consequence of that little exercise.

    Debt is the death of consumption. So what happens to the productive enterprise then?

    ‘Manufacturing (aka: productive enterprise) is a path to a medium-term economic surplus.’ That’s Plan A: So where is Plan B?

    We (in Ireland) have a low population density – and falling? We have a temperate climate. A well-developed agri sector, an adequate supply of arable land and, so far, an adequate supply of un-contaminated fresh water. We work our strengths, or we go back to the 1930s.

    I’m not saying we ‘forget’ manufacturing. Just acknowledge its significant shortcomings – in the Irish context. And its inability to provide anything other than short-to-medium term ‘prosperity’. There is a great deal that we might re-learn from less developed nations about ‘making-do’. We have been there ourselves. Those personal knowledges and skill-sets may have gone, but surely there is a written record somewhere? I know there is! But maybe its ‘inconvenient’ to discuss. Suits, shirts, ties and penury? Or overalls, grimy hands and food on the table? I’ll settle for the latter.

    Cheers.

  7. Very interesting!

    I am wondering when it will be the best time for Greece and other euro peripheral economies to leave the Euro.

    Their current accounts now seem to have been stabilized and more or less balanced. Are there any theoretical arguments to support this intuition?

    Regards,

    Tomo Nkamamaru

  8. @Brian Woods Snr.
    Suits, shirts, ties and penury? Or overalls, grimy hands and food on the table? I’ll settle for the latter.

    My interest is development by communities.
    I have just spent a fortnight with a visiting friend driving around the country and in viewing what we have through her eyes I am struck with how uniquely beautiful the place is.
    But also, I was able to recognise the efforts from communities; spontaneous voluntary work that other countries find difficult to generate to the same scale, work that visitors think was done by the regular local authorities.
    I suspect that it may be the community involvement in the local which is keeping the country from exploding in anger: the ‘usual suspects’ of local activists are venting their displeasure by getting into their ‘overall, grimy hands’ and hitting the streets with rakes and festivals. They are building on their enjoyment of their sense of place.

    A well-developed agri sector, an adequate supply of arable land and, so far, an adequate supply of un-contaminated fresh water.
    Those personal knowledges and skill-sets may have gone, but surely there is a written record somewhere?
    There is, and it is being replicated, and it deserves a lot more respect than the Suits, shirts, ties and penury brigade are offering. Does anyone think that the Gathering could have been built on Temple Bar, Guinness Storehouse and Killarney?

    Brian, your point on the unsustainability of permagrowth in industrial output seems valid. Let’s assign that to Bourdieu’s material and human capital.
    Is there then a place for growth in social capital and are we sitting on a ecosystem that could generate it?
    I believe we are, but it needs more thinking to be diverted to it, and less to the problems of macro-economy. There is after all, only so much talent in any community and diverting its attention to searching for answers which it cannot then implement is a waste. Interesting and engaging, but it should not be the prime focus.

  9. @ Conor O’Brien: Thank you for your thoughtful reply. Much appreciated.

    “Is there then a place for growth in social capital and are we sitting on a ecosystem that could generate it?”

    This is what I call a ‘challenging question’. Social capital was (still is) an uniquely important human attribute. Its how we survived, and thrived – so far anyways. It started to decline after WWII – I think. And has been declining since. Its needs re-building. How? I do not know. But I shall give it some thought. Parish communities were essential social, political and economic constructs. And for very significant reasons. Maybe?

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