ANALYSIS : FBA changes leave big credibility gap

ANALYSIS : FBA changes leave big credibility gap.

An economic setback is pending as the government has lost significant credibility in running economic policy after its surprise move to amend the Foreign Business Act (FBA).

Many economists and foreign investors are frustrated at the way the Cabinet last week imposed more restrictions on foreign investment.

"I'm really concerned about economic growth this year," said Sompop Manarungsan, an economist at Chulalongkorn University.

It came as a surprise that the new policy was recommended by economic ministers, led by Deputy Prime Minister and Finance Minister MR Pridiyathorn Devaku-la, who has a reputation for competence in economic management.

Commerce Minister Krirk-krai Jirapaet also has the image of a most liberal bureaucrat, while Industry Minister Kosit Panpiemras, a trained career economist, often preaches fair competition and the virtues of a market economy.

The reputation of these key economic ministers suggested the promise of continual economic liberalisation when this government was formed after the military coup in September.

Economists, foreign investors and observers who closely monitor economic development earlier welcomed them and had great expectations of a better economic policy. Yet the three have opted for protectionist policies, which numerous studies say will result in a net cost to the economy.

Over the past four decades, Thailand has been considered to be a liberalised economy and a place that recognises that foreign direct investment plays a considerable role in economic development.

Although the law and numerous regulations impose various restrictions, the country in practice has a liberalised economy. This paradox is a product of battles between the proponents of free trade and investment and the opponents of liberalisation in society.

Ammar Siamwalla, a leading economist, earlier argued that as a compromise to objections from conservative groups, the liberal capitalists have tactically gone along with the strict laws and regulations, but when the liberal wing has political power, they never enforce these laws, resulting in liberalisation in practice but under obscured rules.

Indeed, ever since the rules governing foreign businesses were established in 1972, several former governments have actively promoted foreign investment and encouraged it through only sporadic strict enforcement.

The majority of economists would agree that past liberalisation has contributed significantly to current economic strength. For example, Thailand is much better off than India, which has traditionally implemented a high level of industrial protectionism. China, Vietnam and others in recent years have moved fast from centralised economies to liberalised ones.

The virtue of liberalisation is the competition offered by market mechanisms that, in theory, deliver economic welfare better than centralised or monopolised economies.

"It is a big step backward," said Somkiat Tangkitvanich, a researcher at the Thailand Development Research Institute, describing the draft of the Foreign Business Act.

After encountering criticism, Pridiyathorn changed some of his previous positions and has indicated that the government may remove some businesses from the protected list, known as Annex III, which covers the service sector.

The Commerce Ministry will immediately revise the protected list when the draft bill passes the Parliament, Pridiyathorn said last week. Critics said he should have moved earlier, when the drafting committee proposed three options to him and Krirk-krai.

The three include a proposal to remove the entire list of services in Annex III from the draft, then leave the door open for Thai firms to later complain if they face serious problems from competition. The second option is to retain some specific businesses in Annex III. Third is to retain all service businesses in Annex III to receive protection from foreign competition, for the rather weak reason that they are not ready to compete with foreign firms. It is estimated that more than 10,000 foreign firms do business in service sectors in this category.

Among the drafting committee members, bureaucrats prefer the third option. Representatives from the business community have been under strong pressure from local big business groups, which prefer unlimited protection from the government, according to a source in the drafting committee.

Academics on the committee prefer the first choice and do not agree with the third because it imposes blanket restrictions that would do more harm to economic prospects in the long run. They are worried that it would lead to business monopolies by a few big local firms, said the source.

This government has also promised to restore a level playing field and economic fairness for business after accusing the past government of damaging it, but its recent action proves otherwise. How can the government answer the question of fairness while forcing some businesses to reduce their shareholding in firms to below 50 per cent within a year as they violate the new business law?

Unfairness arises because foreign investors have long been told by bureaucrats and ministers in almost every former Thai government that they could do any business in Thailand, though the regulations might theoretically prevent them from doing so. That has resulted in economic liberalisation in practice, as described by Ammar.

The credibility of the government has already suffered considerably and it is likely to be followed by economic setbacks. It might be avoided if law enforcement is weak or selective, as was done deliberately in the past, or a change of the draft is made during scrutiny by the State Council or Parliament.

Wichit Chaitrong

The Nation
Mon, January 15, 2007