The Common Touch

Winai Tatasuthai, a 45-year-old cowherd living in the tiny northeastern Thai hamlet of Baan Dongsaensuk, owes Prime Minister Thaksin Shinawatra debts of both money and gratitude. Three years ago, Winai could barely make ends meet; today, he’s a modestly successful entrepreneur, proudly serving up plates of roasted chicken from his own barbecue pit at a roadside marketplace. Winai’s life changed when, in 2001, Thaksin set aside 1 million baht—about $25,000—for each of Thailand’s 80,000 hamlets to form a fund that would provide low-cost loans to farmers, artisans and other needy villagers. Winai borrowed $250 from the $2 billion Village Fund, bought a few chickens and a three-wheel motorcycle with an attached charcoal grill, and began rumbling around villages, hawking wings and drumsticks. The 20 chickens he now sells daily net him a profit of $7.50—tripling his annual income. Winai has bought a pickup truck and expanded his herd of cows, and he no longer struggles to pay his 16-year-old son’s school fees. “Life is getting much better,” he says. “I didn’t have enough money to do anything. Now I have the freedom to do what I want.”

Baan Dongsaensuk’s residents and tens of thousands of other poor Thais who have borrowed from the Village Fund will, with perseverance and luck, also pay off their loans. Debts of gratitude fall due on Feb. 6, when Thais vote in a national parliamentary election. Polls show that members of the Thai Rak Thai (Thais Love Thais) party, which Thaksin founded, could corral 350 of the legislature’s 500 seats, up from around 300. Under Thailand’s parliamentary system, this overwhelming majority would virtually ensure that Thaksin, a self-made telecommunications billionaire who took office in 2001, will remain as Prime Minister and hold an even firmer grip on power.

Thaksin’s economic policies, known as Thaksinomics, are key to his electoral appeal. Designed to support farming and cottage industries and to boost the incomes of the country’s downtrodden, his programs have contributed to an impressive economic boom. Over the past four years, Thailand’s GDP has surged by a total of 22.2%—the second fastest rate in East Asia after China. Rural incomes have grown by 20% annually over the past two years, according to Goldman Sachs. Thaksin’s policies have turned him into something of a popular hero, hailed by his fans as the decisive, no-nonsense leader who has lifted Thailand from the doldrums of the Asian financial crisis, restored Thai pride, and lavished cash on the forgotten backcountry. Not even the Dec. 26 tsunami, which left more than 5,300 dead and caused an estimated $1 billion worth of damage in Thailand, is expected to knock the country far off stride. Morgan Stanley predicts its GDP will grow 5.7% in 2005. Thaksin “has made things happen,” says Somboon Nonta, another Baan Dongsaensuk villager. “We can see it and we can touch it.”

Yet perhaps no other leader in Asia today has proved more controversial than the 55-year-old former policeman. “He is dividing the country right down the middle,” says Senator Jon Ungpakorn, a vocal critic of the Prime Minister. To his admirers, Thaksin is an economic visionary with the courage and strength to tackle intractable problems—from entrenched bureaucracy to rural poverty—and to restore order after decades of political upheaval. To his detractors, he is a near autocrat who runs roughshod over opponents and relentlessly extends his own power—for example, by naming his cousin as head of the armed forces and appointing his brother-in-law as deputy national police chief. Everything Thaksin does is colored by this impassioned debate. In 2003, a nationwide crackdown on the drug trade left more than 2,500 people dead and human-rights activists’ howling about a lack of due process and the possibility that some who died had no involvement with the drug business. The administration blamed most of the deaths on drug dealers’ killing one another out of fear that their associates would turn them in. “Murder is not an unusual fate for wicked people, and the public should not be alarmed by their deaths,” said Thaksin. Jakrapob Penkair, a government spokesman, says the antidrug campaign is consistent with the law and will likely continue if Thaksin wins a second term: “People around the country express much satisfaction in the success of this policy.” Last October, there was more bloodshed when Thai security forces responded to an escalating Islamic insurgency in the south of the country, leaving 85 Muslim protesters dead—most of them suffocated after spending hours stacked handcuffed in the back of military trucks. Thaksin expressed regret for the loss of life and acknowledged that the local authorities erred in how they transported the detainees. But he also stressed that security forces were facing a hostile situation organized by people with militant ties. “This is not about religion at all,” he said, “[but] a matter of law and order.”

The virtues and limitations of Thaksinomics have also inspired heated debate. Some claim that Thaksin’s economic programs are little more than populist handouts and easy-credit schemes that, like a caffeine high, won’t produce lasting benefits. Some argue that his policies have contributed to a worrisome buildup of consumer debt that will exacerbate the next economic downturn. Thaksin’s measures are “artificial,” says Sompop Manarungsan, a political economist at Bangkok’s Chulalongkorn University. If these “welfare-like” policies continue, “you’ll have more and more distortions in the economy that can hurt future development,” Sompop adds.

Then there’s the controversy over Thaksin’s own business empire. When he became Prime Minister, he complied with Thai law aimed at avoiding conflicts of interest among public officials by transferring most of his holdings to his son and two teenage daughters. Still, his critics claim that firms controlled by the Thaksin family, led by wireless-and-satellite telecommunications company Shin Corp., have benefited from government policies. Somkiat Tangkitvanich, a research director at the Thailand Development Research Institute, a nonprofit think tank, cites as an example a 2003 regulation introduced by the government that imposed an excise tax on companies in the telecom sector. He argues that this created a barrier to new entrants and protects Shin’s position as the country’s dominant provider of mobile-phone service. “I believe that the benefits generated by the economic boom under Thaksin’s regime don’t distribute equally among the people,” says Somkiat. However, Shin’s assistant vice president Panya Thongchai calls such criticism “unfair and misleading,” noting that the excise tax applies equally to all players in the industry, including the Thaksin family’s firm. Government spokesman Jakrapob denies that Thaksin’s administration has pursued policies that specifically benefit the Prime Minister’s companies, noting that “when the economy does well, every company benefits.”

Yet Thaksin has endured such controversies with only minimal political damage. His approval ratings have rarely dropped below 50%, and are currently approaching a remarkable 80%. Panitan Watanayagorn, a political analyst at the Institute of Security and International Studies at Chulalongkorn University, sees similarities between Thaksin and U.S. President George W. Bush, another polarizing leader who was re-elected despite furious opposition. Like Bush, Thaksin “is very good at making politics simple so that the people can understand,” says Panitan. “He has the ability to appear ordinary. He is the people’s politician. The perception is that he can fix whatever goes wrong”—an impression that was reinforced recently by Thaksin’s quick, assertive reaction to the tsunami disaster.

When Thaksin took office, Thailand was still suffering from the effects of the Asian economic crisis of 1997-98. Growth was solid but hardly electrifying, and business confidence was fragile. At the same time, Thailand was being buffeted by global economic shifts. For decades, growth had depended on exports of low-cost goods like sneakers to the U.S. and Japan, but Thailand was losing its competitive edge to China’s manufacturing juggernaut. Thaksinomics offered a solution: strengthen the rural sector and uplift the poor to develop a strong domestic economy, so that the country would be less dependent upon exports and less vulnerable to external economic forces such as the buying power of the overstretched American consumer. “The old strategy simply won’t work,” explains Uttama Savanayana, a vice minister of finance. “We had to come up with something new. We had to start on the inside.”

Among other programs, Thaksin built a marketing network to help small craftsmen export their wares, established a People’s Bank that offered microloans to budding entrepreneurs, and introduced low-cost health care. Morgan Stanley economist Daniel Lian, who recently wrote a report in which he praised Thaksin for his “comprehensive road map charting the future of Thailand,” says: “I don’t find a single person who has offered a policy alternative to Thaksin’s.” The economy has also performed well beyond the policies of Thaksinomics, benefiting from robust global growth, high commodity prices and increasing trade with China. Thai factories have been running at 75% of capacity in recent months, a seven-year high, and unemployment fell to 1.6% last year from 5.7% in 2000. Says Goldman Sachs economist Adam Le Mesurier: “I don’t think the economic recovery in Thailand is a mirage.”

But efforts to stimulate domestic demand by encouraging the masses to borrow money have backfired elsewhere. Several years ago, South Korea boosted consumer spending by offering incentives such as tax credits for credit-card use. It worked for a while. But borrowing resulted in tens of thousands of South Koreans’ sinking heavily into debt, and today Seoul is wrestling with depressed domestic spending and slowed economic growth. Thaksin, similarly, has pressed state banks to boost lending to consumers, especially for housing, and Thailand has seen a worrying increase in household debt—which on average has surged 62% since 2000. Thailand’s debt problem hasn’t reached nearly the excessive levels seen in South Korea, and the Bank of Thailand recently released a report asserting that the risks are “manageable.” But the same report went on to warn that “this may not hold true in the future as debt will continue to grow.” Says Bank of Thailand governor Pridiyathorn Devakula: “We cannot be complacent. We are very serious about it.”

No program is as emblematic of Thaksinomics as the Village Fund, which has provided the rural poor with the money to invest in everything from workshops to rice paddies. As a businessman, Thaksin understood better than other politicians the significance of providing cheap capital to those who usually cannot get it. Yet it’s still unclear how much lasting impact the program will have on the lives of the poor. Wichai Turongpun, a director at the National Institute of Development Administration in Bangkok, spent a year studying the program in 19 provinces in the country’s northeast and concluded that the results are mixed. Much of the money borrowed, he says, was used to pay off other, high-interest debt or to cover school fees. In a small number of cases, Wichai says, loans were wasted on mobile phones and motorbikes. Though officially the repayment rate on these microloans is nearly 100%, in some cases, Wichai says, borrowers are turning to predatory loan sharks to raise money to pay back the government. Though the fund has helped the poor to a degree, Winai says, “it doesn’t serve the main purpose—that people can use this money to generate income and have a better living.” The Finance Ministry’s Uttama responds: “In a program like this, there will be different results. The thrust of it is very much on track.”

Udol Kamta can attest to some of the program’s drawbacks personally. Before Thaksin’s Village Fund was launched, Udol had almost no debt. Today, the 50-year-old farmer and his family owe the fund $2,250, but the income he ekes out by tilling rice and red chilies is too meager for him to pay it off. “I’ve never had such extreme problems in my life,” says Udol. His troubles began three years ago when the 1 million baht hit his hamlet of Nhonghoi in Thailand’s northeast like a winning lottery ticket. A committee of local villagers parceled out the loans liberally. Udol borrowed $500, invested it in a new chili field, and waited for his fortune to roll in. But like many of his fellow farmers, he lacked business experience. Though his chilies earned a little extra cash, it wasn’t nearly enough to cover his $500 loan plus 6% annual interest. So when the debt came due after one year, his wife borrowed $500 from the fund for him to use to pay back his own loan. Then the family dug itself in deeper. Udol borrowed another $500 to help with the costs of his new chili field, his son borrowed $500 to pay school fees, and his mother-in-law took a $750 loan to invest in new cows. He hasn’t been able to pay any of it back. Each time the loans come due, says Udol, he temporarily borrows from emergency savings held by Nhonghoi’s elders to repay the Village Fund, then borrows more from the fund to erase his debt to the chiefs. “I didn’t know how to manage the money,” Udol says. “If I had known what would happen, I wouldn’t have taken the money in the first place.”

Udol’s tale of woe is far from unique. According to Nhonghoi’s head chief, about half of the residents who borrowed from the fund have become snagged in a similar debt trap. In nearby Baan Nhong Ku, locals spent the first two years of the program borrowing from one another to pay back the fund in full, but this year a poor rice harvest starved the town of extra cash. The inhabitants have taken on extra work on construction sites to make up the difference and have begged the local government office to extend their payment deadline.

Meanwhile, in the hamlet of Baan Dongsaensuk, residents are becoming less inclined to repay at all. Somboon Nonta, who sits on the village’s loan committee, says he considers the fund “a donation” from the government—so he has allowed residents considerable leeway to pay back loans whenever they can afford it. “I don’t know when this money will be repaid,” says Somboon. “If we force people to pay the loans back, it could force them to commit crimes or borrow the money from elsewhere.” Alican Tayukhen, the leader of a small Muslim community in the area, calls the Village Fund “a lot of trouble. Thaksin played a game to please the villagers, but didn’t realize the damage that would be done.”

Still, wealth transfers from the government—whether in the form of loans to the poor or tax breaks for the rich—rarely end political careers, as long as the majority of voters perceive that they are reaping benefits. Thaksin is already planning new initiatives for his second term, including a spending spree on road construction, mass-transit systems and other megaprojects with a price tag that the Finance Ministry says could reach a total of $38 billion over the next six years. “Thaksin understood, before anyone else, that in today’s Thailand, popularity is the name of the game,” says Panitan, the political analyst. “It’s not about fighting for democratic rights. It’s about policies and what you can deliver to the masses.” Whatever happens in the February election, Thaksinomics must prove it can truly deliver for Thaksin’s legacy to be assured.