The Economics of Thailand
A conundrum wrapped in a paradox is perhaps the best way to describe Thailand, and its economic system is no exception as our rolling travelogue will illustrate. To pick apart this puzzle, I had the assistance of the only two geoists in Thailand, who were also my gracious hosts in Bangkok – retired vice-admiral Suthon Hinjiranan and his son Pop, who has a PhD in town planning. Suthon recently translated “Progress and Poverty” into Thai and is battling alone against a tsunami of cashed-up property developers but, like a true Cat-Seer, agrees that “everything else is a waste of time”.
Firstly, a few basic facts on Thailand: population – 62 million (32% in urban areas); life expectancy – 70 years; GDP per capita – US$9000; ethnicities – 75% Thai, 14% Chinese and 11% other; religion – 95% Buddhist; literacy – 94%; economic system – speculation-fueled neo-classicism tempered by traditional cultural values. But let’s dig deeper to unearth how the vast proportion of Thais earn a paltry A$4 or $5, alongside an obscene number of brand new urban assault vehicles (4WDs) cruising the streets?
Why are there sparkling new skyscrapers and shopping malls alongside sprawling urban slums and vacant land?
To be fair, there have been many good politicians seeking to implement wise, well considered national goals, and Thailand’s rise as an “Asian tiger” lifted many out of even worse poverty. It’s worth quoting the four major national policy guidelines: policies for stable & non-inflationary growth, income redistribution, human resource development and environmental protection. You can’t argue with those, but the road to economic Hell is littered with good intentions.
In modern times the Thai government, vulnerable in its financial dependence on a few primary commodities (rice, rubber, tin, and teak), has pursued a policy of economic diversification through industrial development and increased agricultural production. En route, Thailand has undermined all these decent goals in the way it has adopted the standard land monopoly capitalism with which we are all too familiar.
Just about everyone in Thailand seems to have a strong opinion on former prime minister Thaksin Shinawatra, although attitudes vary widely. He is Thailand’s richest man and the centre of endless controversies, and was prime minister until a bloodless military coup ousted him in September 2006.
His so-called Thaksin-omics revolved around populist economic policies such as subsidized petrol, diesel and electricity tariffs, to which Mr. Ed begs to jump in and complain that what might appear good for the poor actually subsidises the wealthy squanderers more than anyone – such subsidies are, in effect, negative natural resource charges!
Thaksin also pushed for continued privatization of state-owned enterprises as well as an array of mega-projects, which involved investing over $50 billion in public works, including roads, public transit, and a new international airport. Anyone in Australia who has been the paying customer of a privatised service that has fallen into the hands of Macquarie Bank could have forewarned Thaksin that a natural monopoly should never fall into private hands.
Here we should note that the criminal charges which Thaksin’s wife is currently facing involve a dodgy land deal which Thaksin himself influenced in favour of his wife. In any case, Thaksin’s economic policies amounted to little more than traditional, flawed Keynesian fiscal stimulus policies re-branded as a revolutionary economic doctrine through his powerful media influence.
And how has this infrastructure been paid for? Largely, by a traditional type of legalised robbery called “taxation”! While some economic rent from natural resources (including land) is collected in Thailand, the means as well as the amount of rent collected is deplorably miniscule. These charges are in place both at national and local levels.
The principal taxes in Thailand include the usual rag bag of punitive measures to punish honest and productive endeavour – direct taxes (a progressive personal income tax with a top rate of 37% and a corporate income tax of 30%) and indirect taxes in the form of a value added tax of 7%. While it is virtually impossible to evade a properly-established tax on land values, business taxes in Thailand are notorious for having “sweeteners” quietly slipped to tax assessors to help them understand how the income being investigated falls below the tax threshold.
Here’s a tale of two taxes – how advances in technology (especially accounting software) have led to Australian tax authorities foisting ever more tax compliance costs on our businesses, large and small. Poor, “unsophisticated” Thailand is actually blessed in that its own tax authorities cannot yet make such crippling impositions.
The story is that we met up with an Aussie expat who married a Thai guy a few years ago and now runs a jewellery business in both Thailand and Australia. As she herself said, Thailand’s tax compliance are very simple and quick because Thailand’s populace are not educated enough to be required to do more. My Thai colleague, Pop, explained simply yet powerfully how street vendors could not possibly comply with income or GST requirements: “The banana cannot have the tax!”
But our Aussie acquaintance is almost at the point of abandoning her Australian operations because of the massive compliance costs here. You might have thought that ever-improving accounting software such as MYOB (or MYOFB, as some call it!) might have made things easier for small and medium-size businesses, but it has actually worked the other way.
The way the Australian Tax Office sees it goes something like this: “Hey, there’s a terrific new version of MYOB about to be released – that means we can foist even more of our work onto the taxpayer!” Australia’s GST, imposed in 2000, could never have been possible if not for the relatively-new software that enabled the tracking and compilation of every cent of GST paid and GST collected.
Not for the last time will Mr. Ed echo the ancient utterance “The power to tax is the power to destroy!”
Thailand does, however, collect a portion of the rent from land, although the amount collected is generally small and the means of implementation often fundamentally flawed. In some places a property tax is rightly applied on land values only, but in others it applies to land and improvements. Where it does apply to land, oftentimes little or no account is taken of the all-important locational value of land (that is, the tax is based on the number of square metres of land).
In rural areas, it’s similarly simplistic and clunky – in one place we visited the charge was 50 baht (A$2) annually for a 40m x 40m plot of fruit-bearing land, and 10 baht for rice land – the proverbial “peppercorn rent”.
One of the aspects of Thailand’s land tax which renders it almost ineffective in forcing land to be properly utilised is that it is usually deferrable until land is actually sold, when it is then paid by the buyer (who would take the accumulated land tax into account when calculating his bid for the land). In villages, properties are rarely sold but passed on to the next generation – so land tax is avoided and there exists none of the usual incentive making better use of it through the annual collection of the site rent.
In other rural areas, one cannot officially sell land but unofficially it is sold with no title deed, setting up a lawyer’s picnic down the track.
Similarly, it is illegal to engage in slash and burn agriculture (degrading land then moving on to a new plot), especially since the tragic mudslides which Thailand suffered in the late 1980’s. In practice, slash and burn is still widespread. Forest cover fell drastically from 53 percent in 1961 to 25 percent in 1998.
Measures taken by government in the late 1980s to prohibit logging have begun to pay dividends, and the deforestation rate has fallen (officially, at least) to 0.2 per-cent/year. However, the legacy of deforestation is creating other environmental problems, such as conversion to dry lands, sedimentation of rivers, and loss of natural habitats.
One of the greatest threats facing Thailand’s forests is illegal logging, which continues to rapidly degrade Thailand’s remaining forests, despite the nationwide ban on rainforest cutting. Investigations by NGOs reveal that trees are felled in Thailand and smuggled into Burma to be exported as Burmese logs or processed logs. The industry is controlled by timber barons who, at times, have strong ties to politicians and the military.
In remote areas, forestry officials have difficulty enforcing the logging ban due to armed gangs hired by illegal timber operators. Further, villagers in some parts of Thailand have come to rely on logging as their primary source of income. Parks appear to serve as prime harvesting grounds – for example, 30 percent of Salween National Park was logged between 1997 and 1998.
Is such criminal behaviour surprising when the incentive to profit from exclusive ownership of natural resources is embedded in the heart of neoclassical economics?
Only when natural resources are treated as the Common Wealth of all – which wealth is the natural source of public finance – will governments have the financial impetus to protect them by devoting the necessary resources to combat both criminal elements and irresponsible villagers.
You don’t have to be an accountant (as is Mr. Ed) to know that the two essential financial statements that a business needs to produce are the Profit and Loss statement (showing the business’s performance over the last period) and the Balance Sheet (showing the net assets at a point in time).
Neoclassical economics disguises its insane devastation of a nation’s natural wealth (air quality, forests, water quantity and quality, fisheries etc.) by simply ignoring them! That is, it only reports on a nation’s notional income (National Accounts) without keeping account of a nation’s natural wealth/assets.
If a proper cadastral survey of the “wealth of the nation” (land) was taken, then things could be put in order and landholders identified. Then a system of site rent could be implemented based on maximum sustainable yield whereby farmers are given a system of positive incentives to improve the agricultural worth of land and disincentives against degradation.
Thailand does, however, have a measure designed to prevent properties falling into too few hands – in stark contrast to Australia, where all sorts of tax breaks are given to investors, ultimately acting against the interests of prospective first-home buyers. In Thailand, a house and land tax is imposed on the owners of a house, building, structure or land, which is rented or otherwise put to commercial use. The tax rate is 12.5 per cent of actual or assessed annual rental value of the property.
With very few natural resource charges in place and no proper monitoring, it’s no surprise that Thailand’s environment is going south. Over the last decade, Thailand has been increasingly threatened by the problem of industrial wastewater, hazardous wastes, natural re-sources degradation, worsening air and water pollution and a decline in biodiversity level. The major causes of air pollution in Thailand include cars and other transport vehicles, manufacturing factories, agricultural productions and open cooking.
The daily traffic congestion in Bangkok is deplorable (fine particles in Bangkok’s air exceed WHO standards by 2.5 times), with the “China-style” face masks being worn by an increasing number. Overall, it is estimated that air and water pollution costs the country 1.6 – 2.6 percent of GDP per year – an extremely conservative estimate, by all accounts.
It should be said that, in response, the Thai government has launched new initiatives to improve air and water quality, reforest degraded land, adopt energy efficient technologies and invest in pollution abatement schemes. The Government’s decision to phase out leaded gasoline has reduced ambient levels of lead, and there are also signs of greater private sector interest in environmental quality.
For example, the country’s oil and gas conglomerate is investing in Compressed Natural Gas, a much cleaner fuel source, and has said that this will account for 10 percent of all fuel used in the next five years. But how much more simple and effective would be the imposition of natural resource charges based on the True Cost of each grade of fuel?!
We hear about “market based instruments” ad infinitum from neoclassical economists, but here’s a measure that will send clear price signals from the point of extraction/importation right through to the end user at the petrol pump.
Furthermore, the failure to hold polluters financially responsible through geoist eco-taxes has also resulted in volumes of untreated domestic sewage, industrial wastewater and solid hazardous wastes which have risen dramatically in recent years. The result is that roughly one third of Thailand’s surface water bodies are considered to be of poor quality.
Geoists continually bemoan how land mapping – the all-important geoist instrument – is neglected by governments, so it will come as a shock to hear that the erstwhile economic planetary bogeyman, the World Bank, has been making some terrific progress in Bangkok. The capital of Thailand has many if not most of the problems facing cities in developing countries, not least air and water pollution, deteriorating utility infrastructure, an insufficient mass transportation system (hence Bangkok’s infamous traffic jams) and, for many, a poor quality of life in the city.
But let’s wrap this essay on a hopeful note by recognizing how some things are improving thanks to World Bank assistance, whose urban research division recognised back in 1990: A well functioning land management system — with all its component parts — is essential for orderly urban growth, a dynamic private sector and an efficient housing finance sector. And would you believe that the World Bank recommended putting in place the following systems in urban areas?!! –
- a system of procedures and regulations to ensure the development of land at affordable cost
- land taxation measures to promote efficiency and equity in land use
- a land registration system which ensures that land ownership can easily be identified and transferred and that property taxes can be assessed and collected
A squiz at the World Bank’s website indicates that has also done a lot of work to confirm the benefits of urban property taxation in developing countries, showing that property tax can be an efficient, equitable means of financing municipal services in developing countries. The bank concludes that in most countries property tax needs reform and goes on to say that appropriate land information management systems:
- contribute to cities running more efficiently
- ensure adequate taxes are raised
- contribute to improved services
- generally lead to cities being able to better play their usual role of being the engines of economic growth in the country.
Some newcomers to our movement assume at first think that geoists are against any form of individual property rights and instead favour some sort of dreamy commons which we roam like nomads without any claim of ownership. Despite the romantic notions of Chief Seattle and the free roaming of the prairies, this is not the case at all.
Security of tenure is an absolute requirement in any productive society, and land titles are an integral part of such. The Common Wealth can be shared with absolute justice simply by collecting the economic rent of land and natural resources. Therefore, geoists are unquestionably in favour of the legal recognition of property rights – that is, rights of exclusive use and control over particular resources – which give owners incentives to use re-sources efficiently and to create improvements on that land.
Efficiency can be further served by making property rights transferable. Once again, the all-important proviso is that the full economic rent of land be collected for the public purse (enabling, at the same time, the phasing out of taxes on honest work).
But, despite these insights and assistance from the World Bank, the scale of site rent collected remains low, while the punitive taxes on work and exchange perform their age-old task of discouraging honest endeavour and setting up a black economy, with all the associated criminal elements that inevitably arise in such situations.
Hey, the tax system makes cheats and liars out of nearly all of us – looking at the wealthy’s tax-minimisation schemes, why should we be the mugs?
How much rent is being collected from land? I only had to look at the skyrocketing real estate prices to firmly conclude “bugger all!” The other obvious indicator was vacant land – even in the heart of the biggest cities, tracts of land worth a king’s ransom were being kept out of production by speculators. My partner, Andrea, had caught on to the whole geoist paradigm effortlessly – I had only to point to another block of weed-infested land to prompt her to cry out “Where’s the LVT?” Alas, were it only so easy for over-educated (read: neo-classically brainwashed) economic ministers to see so clearly.