Thursday, June 11, 2009

The financial crisis in 1932 that took down absolute monarchy

A long lost cousin of mine connected with me on Facebook today making me a little bit homesick and thinking about my family from Sakolnakorn. I originally wanted to write about the year 1910 and some events that had rippled from the center to my hometown close to the border of the Mekhong.

I was looking through a history book for ideas about how to shape my post on 1910 but got sidetracked by an account of a "financial war" in the year 1932. It’s curious how we tend to overlook small details in history when it is overshadowed by larger events like the end of absolute monarchy and the birth of Thailand’s first constitution.

This small detail of how bad public financial management can put a government in a tough spot seemed to be a more worthy subject to write a blog post about to relieve myself a bit (just a teeny, weeny bit) of my self-imposed theme of economics which doesn’t seem to gather much attention here (yet still a point of interest close to my dear subject), so 1910 got pushed aside and here’s an interesting anecdote from the year 1932 in Thai history:

Anyway, the connection between 1910 and 1932 was that 1910 was when one of Thailand’s greatest king past away, leaving the country in a bit of a shock and vacuum. From the short period of 1910-1932 we saw two kings come and go.

King Prajadhipok didn’t expect to reign but many unfortunate events left him with a legacy of chronic problems, one of which was the finances of the state. The budget was heavily in deficit and the royal accounts a nightmare of debts and questionable transactions.

Pages 235 to 239 of David K. Wyatt’s “Thailand: A Short History” makes an interesting reread. So many echos of the present found in the past. I hope my readers can find the book on some dusty bookshelf, I don’t want to be accused of plagiarism or infringement of copyright.

So the Great Depression hits Siam and the price of rice dropped by two-thirds, inducing a spiral of reduced cash income, less taxes, credit falling apart, inability to buy retail goods and government expenditure cut by a third.

If Wyatt’s publisher’s reads me, I am asking permission to quote some words here and now (I know I can get away with a limited number of words):

“To make matters worse, a financial crisis developed as, under the prodding of the British financial adviser, Siam doggedly maintained the gold standard as the basis of its currency, while Britain abandoned it. This came to mean that Siam’s rice was priced much higher than competing rice sold in currencies that had left the gold standard. It also brought about a significant outlfow of gold from Siam.”

“The crunch came as the government prepared the budget for B.E. 2475, the financial year that was to begin April 1, 1932. Battles raged.....”

Public dissatisfaction, prophecies, drafted constitutions, coup d’etat and “Promoters” (49 military and naval officers and 65 civilians) later, history was made.

Debt and monetary standards, I wonder who’s going to be in government when that nasty knot unravels our system again.

Part II (added)

King Prajadhipok inherited a bad account he couldn’t undo coupled with complex incidences happening in and outside of Thailand. His administration’s inability to split the pie properly could have been the crucial tipping point for that important political change in Thailand.

Here’s my summary of the internal and external events that contributed to political malaise during that time:

  1. Huge budget deficits inherited from King Vajiravudh. Some of which were: 8% of 1910’s budget went to the new King’s coronation ceremonies costly nationalist to build Rama VI’s personal power base, such as, for a special palace guard and Wild Tiger Corp (a paramilitary group). Wild Tigers Corp was most expensive... nearly 20% of royal budget, 1.6 million out of the 96. million state budget-10% royal expenditure; 23% to military expenditure; Privy Purse and Ministry of the Palace were consuming nearly 10 percent of the annual budget
  2. Inability to find an accounting standard to control government expenditure causing power struggles within and between ministries and eventually laying off govt. work3. Financial mismanagement that aggravated the situation, such as borrowing from abroad, unpopular salary taxes, taxing land owned by peasants
  3. No policies for distribution of income, Thais becoming increasingly left out of economic activities dominated by Chinese and foreign merchants
  4. Lack of social investments, especially insufficient budget in support education, only 3 percent of the budget was allocated to education
  5. Rising affluence of Chinese minority accentuated by nationalistic sentiments, anti-Chinese and fear of communism among the Thais, anti-Japanese among the Chinese who had private schools and own press
  6. Only one dominant industry: rice export, controlled by Chinese merchants
  1. The post war environment, rise of nationalism, fear of communism, perceived threat of China’s proximity
  2. The great depression, price of rice fell
  3. Delayed exiting of the gold standard exchange regime, silver and gold just bled out of the country

One of the first things Pridi Panomyong and the People’s Party did once they took over government in 1932 was to propose an economic development plan. The Plan was rejected as being too socialist. Industrialization, however, was set into motion with establishments of a number of state enterprises. First being the Fuel Division of the Ministry of Defense which later became the Fuel Organization (1953), the precursor of PTT (so my posts are more connected than I thought). Other key state enterprises set up that was the beginning of industrialization (much earlier than the 60s as I originally thought) were: a spinning and weaving factory, also under the Ministry of Defense, to produce military uniform, later to become Siam Cotton Mill (1953); a paper mill; and a sugar refinery.

Saturday, June 6, 2009

Tracing self-sufficiency back to energy security

From plastics to petrochemicals to oil and gas

I was recently hired to be an interpreter for a Thai technician who was sent to Mexico by a French company based in Thailand to re-adjust a serigraphy machinery built in Thailand and imported to Mexico last year. I was intrigued about why and how the machine came from Thailand and started doing some research about plastic packaging.

Mexico is a major oil producing country and plastics would seem to be a natural downstream industry. However, she imports many of her raw material because the petrochemical industry is not able to produce enough due to lack of new investments in the last 20 years. Oil production and its by-products is a government monopoly run by PEMEX, Mexico’s equivalent of PTT in Thailand. However, the energy sector in Thailand is more fortunate than Mexico’s since competition has been engineered into the sector since the beginning.

Having grown up in the Middle East, I’ve been fascinated by the story of oil and its power over the world economy. I presented a paper about foreign investment in the oil sector of Thailand for my Master’s thesis. So I find myself visiting the theme enthusiastically again prompted by this unexpected visit to a Mexican plastic factory.

The starting path of Thailand’s industrialization

I discovered that PTT is celebrating 30 years of achievement. Very short compared to PEMEX’s 70 years history. In contrast to Mexico’s faltering petrochemical industry Thailand is quite fortunate to have a thriving one. This is confirmed by the presence of a French company who was confident enough in the future of this sector to invest in building silk-screening machines for plastics in Thailand.

According to PTT’s website, this progressive company was founded in 1978 as a response to an energy crisis stemming from the 1973 Arab Oil Embargo. Achieving energy security was an imperative. Our bloggers’ comments about Thai people’s lack of planning is definitely proven wrong if we look hard enough for some hard evidence, as in the remarkable story of the dedication, persistence, and success achieved in building diverse and competitive upstream and downstream oil and gas industries in Thailand.

PTT was partially privatized in 2001 as a result of a process of liberalization and reform in the energy sector initiated during the premiership of Anand Panyarachun continued by Chuan Leekpai under the leading role of Sawat Bhodivihok. The Thai government has no plans to relinquish its 69% stake with the main enterprise, but gradual liberalization and reforms in the energy sector were set into motion since the 90s. Thailand had found a balance between public and private ownership of this important industry.

Fluctuating oil prices and financial crisis were taken in their stride and the company continues to flourish and is even confident enough to embark acquisitions locally and abroad.

What would this have to do with self-sufficiency? We need to produce what is needed. Energy is the main driving force of any economy. Thailand is still dependent on imported energy but I have hopes measured from how far we have come in 30 years, that PTT’s traditions and vision will guide us towards developing alternative energies and continue to generate other beneficial economic side activities.

Industry organizations and business clubs

Another unique character of business in Thailand and SE Asia is the curious organization of "Associations". These non-profit organizations bring together members of industries to promote dialogue among its members and help make sectors of industries more transparent. Businessmen have a forum to gather and brain storm in nearly a semi-bureacratic atmosphere. The public private cooperation in Thailand therefore is not top down with policies imposed upon businesses by governments. It actually can be a two sided process, depending on each industries' strengths and charismatic leaders as well as industry participants willing to work towards common goals. The role of these organization allow business partners and competitiors alike to know each other. Once confident and comfortable as a group. they are bold enough to approach or give feedback to the government with requests that can help industries grow.

One such organization is The Federation of Thai Industries, under which there is a Petrochemical Industry Club, as well as a Plastic Industry Club. Each club has sections listing directories of company (all members major participants of each sector), and sections explaining the structure or processes of each sector.

The Petrochemical Club (FTIPC) is actually organizing a three day training seminar entitled "Introduction to Petroleum & Petrochemical Business" from June 13-15. You can check the program at their website. (Too bad I cannot attend.)

They are also hosting a regional conference/exhibition, PRA 2010 later in the year during 16-18 November.

Apart from connecting businessmen within the country, the FTIPC is also dedicated to making connections with similar organizations across the region, such as, JPCA (Japan Petrochemical Industry), KPIA (Korea Petrochemical Industry Association) , MPA (Malyasian Petrochemicals Association), and SCIC (Singapore Chemical Industry Council).

The Plastic Industry Club of the Federtaion of Thai Industries was formed in 1982 and has 151 members. These companies are engaged in comprehensive integration of upstream, downstream investments. They range from petrochemical to plastic pellets, components and parts of cars, electrical and electronic appliances, packaging and wide-ranging consumer products including toys, machines and moulds. The state of the indsutry in 2000, reported by the Plastic Industry Club has primary and secondary industries operating at 80-100% of total capacity while plastic pellets exported to South and Southeast Asia rose by 53%. China also shifted polyethylene import from Korea to Thailand. Despite higher output, plastic pellet imports total US$ 1,217 million (+35 %) in 2000 as overseas buyers stepped up orders to forestall any impact from high crude oil prices.

Some comparative figures

PTT was ranked by as 207th largest companies on the Fortune 500 list for the year 2007 and climbed to 135 in 2008. It is also ranked as 17th fastest growing in 2008, with its revenue in 2008 was 51,192.5 million dollars having grown 59.7% from 2007. It’s profit increased by 33% from 2007.

A comparison with other global competitors in the petroleum refining industry can be looked up at:

According to FTIPC’s market overview, the petrochemical industry contributed a revenue that measured 5.8% of Thailand’s GDP in 2008, that is a value of 512,774 Million Baht or 15,539 Million US.

Exports of petrochemicals was 4.82% of total export at 253,294 Million Baht (2007). Its largest market is China.

**(Side note: For the sake of weaving stories, I would like to point out Khun Tawan’s blogpost of July 5, 2008 titled “Thailand’s Energy Solution”. The discussions raised about alternative energies are worth a visit.)

**** A recently published book in Thai, “PTT: The S-curve Story”, can be found at Putalay Bookshop.