Amazing Thailand Grand Sale — and the price tag
Since the crash, more foreign investment has come into Thailand than over the whole decade of the boom.
Most economists believe that foreign investment sparked Thailand’s world-record-breaking boom from 1986 to 1995. A new Japanese-owned factory was opening every three days. Taiwanese investors were being flown in by the plane load.
But in baht terms, the total foreign investment flowing into Thailand in the two years after July 1997 exceeds the total flow over the whole ten years of the boom (493 against 389 billion). In dollar terms, it is already over four-fifths (12.5 against 15.4 billion). And the investment is still arriving at around 1.5 billion US dollars a quarter. By year-end, the post-crash total will exceed the ten-year-boom total in dollar terms.
That means since the crash foreign investment has been pouring into Thailand 4-5 times faster than over a boom which was supposedly driven by unprecedented flows of foreign investment.
Where has this cash been coming from? Over both the boom and post-crash periods, the biggest source has been Japan, accounting for a little under a third. Since the crash, the US and Europe combined have accounted for a little more than a third. There has also been a big inflow from Singapore. Some of this comes from Singapore firms (e.g. DBS bank), but much may originate from the regional subsidiaries of western firms. The total inflow from the west over the post-crash two years is probably larger than over the ten-year boom.
Where has it been going? The sale of banks has hogged the headlines, but the finance sector accounts for only 9 percent of the post-crash inflow. The major destination (42 percent) has been industry. This again copies the pattern of the boom years.
Of course, little of this investment has come in to set up new businesses, new factories, or increased production. Some is vulture capital which will resell when prices rise. Some has come in to help keep devastated businesses afloat. Some is retooling businesses towards export. But the vast majority has come in to buy up existing, crippled businesses at a good price.
Before the crash, most foreign investors went into a joint venture with local partners—some had to because of the rules, some preferred to because of the partner’s local knowledge and contacts. Now the rules have been eased, and the partners are bankrupt. The rough similarity of the boom and post-crash inflows suggests a simple conclusion. In the boom, the foreign investors bought the first half. In the bust, they have bought the second half. Of course, things are really much more complex. Many newcomers have bought only a strategic state rather than majority control. But this thought has a kernel of truth.
The inflows have a clear geographic pattern. Japanese investment goes into manufacturing, western investment into services. Since the bust, many of the Japanese firms in the key export industries of automotive, electrical and electronic goods have bought out their old local partners and some local suppliers. Meanwhile, two banks have gone to western firms, and the two remaining on the shelf should go the same way. Most of the stockbroking industry has been sold to European and American companies. The insurance industry has tilted as local firms crumble, and western firms buy in and expand. A large chunk of the mega-retail business has been transferred to big European firms, while 7-Eleven continues to replace local neighbourhood stores at a spanking rate.
This is undoubtedly the biggest, fastest transfer of corporate assets from local to foreign hands that Thailand has ever seen. Is this a good thing or a bad thing? The question is irrelevant. The transfer has happened. It is far from over yet. It will not be reversed. But what are the consequences?
For economic growth, the results are very positive. These inflows are one of the major reasons why Thailand seems to be fast hauling its way out of the pit. The inflows have helped to relieve the liquidity crunch and stabilise the currency. This year’s growth is driven by an export revival in the key foreign-invested industries of automotive, electrical goods and electronics.
Moreover, this export motor should drive the economy ahead over the medium term. From the onset of the crisis, the major Japanese firms announced they would remain committed to Thailand. Indeed, the buy-outs have increased their commitment. In the boom, Southeast Asia was the most profitable site in the world for Japanese manufacturers. Some believe growth in the region is one way to drag the Japanese economy out of its recession. Several firms have taken the opportunity of the crisis to transfer more of their world-export-oriented manufacturing from their Japan base to cheaper Asian sites. A recent MITI survey of Japanese firms showed they still find Thailand attractive. Why? Because of the firms’ accumulated knowledge of operating here, and because of Thailand’s relative political stability. Comparative advantage is not just a matter of cheap labour, especially for firms managing high-technology production systems. Thailand has more to offer than sex and golf (why do US magazines send pin-heads to Thailand to write stories on the economy?)
In the home market, there will be benefits too. The western firms taking over retail and services promise to benefit the consumer by destroying old monopolies, introducing new technology, and competing to provide the consumer with better deals. The enthusiasm of Bank of Asia for putting branches in supermarkets and subway stations, offering competitive rates, and pushing loans to small businesses—while the rest of the banking sector wallows in gloom—is an advert for this claim.
These benefits are undeniable. Those who lament "selling the country" have to live with this reality. But equally those who welcome the greater foreign penetration will have to accept that these benefits come with costs attached. The most serious of these costs will be social and ultimately political.
An export-oriented growth path tends to widen the gap between rich and poor. A high level of foreign ownership intensifies this trend. This is not theory. This is the experience of the world over the last few decades.
Under an export-oriented strategy, growth is concentrated in a small segment of the economy. All the resources get concentrated there. Other areas get neglected, especially agriculture. Government tries to keep wages down to make the country competitive. This was already Thailand’s experience during the past boom. The income gap between the top ten percent and the bottom ten percent widened over that boom from 17 times to 37 times.
After Latin America went through its own crisis of liberalisation and increased foreign ownership in the 1980s, it found this divisive trend got even worse. One of the major growth industries became protection—selling everything from bulletproof cars to private armies for protecting the small number of rich from the ever larger and angrier mass of the poor.
Thailand has a very different social heritage from Latin America. But it would be foolish to pretend that this social division is not going to become a bigger and bigger problem in the aftermath of this crisis. The profitability of agriculture continues to decline. The technology-based export industries will not need a large labour supply. Government will be paralysed by debt. Thailand has had no strategy to manage this problem in the past, and shows no sign of thinking about a strategy for the future.
Like it or not, the crisis has brought about a step-change in foreign penetration of the Thai economy. The benefits are already arriving. Now someone has to think about managing the costs.