Thailand Swims Against the Current

An interesting news story about Thailand forwarded by Eddie from Singapore:

Thaksin's loan scheme pays off

Thai Premier proves naysayers wrong: nearly 98% of the money lent to poor villagers has been repaid
By Nirmal Ghosh

BANGKOK - When Mr Thaksin Shinawatra campaigned for his Thai Rak Thai party two years ago, he made a promise that most people thought would prove a folly: He would distribute a million baht (S$42,400) in loans each to 70,000 villages if he was voted to power. After becoming Prime Minister, he kept his promise and started the scheme despite warnings that the repayment rate for these loans, designed to help villagers upgrade their farms and small businesses, would be disastrously low. Critics said villagers would blow the money on consumer goods and be unable to repay it, spawning a financial fiasco.

But last weekend, Mr Thaksin triumphantly announced that the repayment rate was a phenomenal near-98 per cent. The much-maligned 'populist' rural loan scheme is actually rewriting developmental economics by creating wealth where it is most needed, says the country's Finance Minister Suchart Jaovisidha. In an interview with The Straits Times, he said the repayment rate had defied criticism and exceeded even his own expectations, vindicating the government. He said he had initially expected - and was prepared to accept - a default rate of about 30 per cent. The actual rate is more than 2 per cent, or 2,009 of the 70,000 villages. 'We spent billions trying to save rich people in 1997 and we failed. Look at the lingering problems in the banking sector. So why not spend money on the poor instead?' he said.

The success of the scheme was all the more remarkable as anecdotal information earlier had indicated that many loans were not being repaid. Mr Thaksin has now announced that the 17,000 villages which managed the funds particularly well would be given another 100,000 baht each. The poor have proved their worth, he added. In the interview, Finance Minister Suchart said he believes in Keynesian economics - but questioned if such a model would work in poor countries like Thailand.

According to this theory, he said, in bad times the government should pump money into investments such as factories, roads and bridges in order to create jobs and growth. But such measures will not work when the purchasing power is low. Mr Suchart argued that when money was put into the hands of the 'grassroots people', about three-quarters of it would be spent on investments, and the rest on consumption, thereby creating more purchasing power. He said that in rural areas, research showed the loans were used on goods like farm tools and fertilisers. Only about 20 per cent was spent on consumption.

Some sceptics are beginning to change their views. The Nation newspaper, which had been critical of the government's scheme, said last week the economy's continued recovery has been like magic. There is nothing magical about it, said Mr Suchart. 'Giving money to the poor is not a giveaway, it is a loan,' he said. 'The lower strata of society has never been able to access capital. And they pay the money back. This is the secret.' The magic is the honesty of the poor, he said.

And now for Eddie's own comments:

Thailand seems to have done something right in terms of lifting their economy from the Asian crisis, & battling against the headwinds of the weak global environment. Remember, 7% GDP growth in 1Q03. Heard that property market in selected areas heating up ... hard to imagine that happening anywhere else in Asia right now, apart from Shanghai ..