This is part two of my February interview with Thai Finance Minister and Deputy Leader of Thailand’s ruling Democrat Party Korn Chatikavanij MP – part one can be found here in English and here in Thai.

Here I ask questions regarding food and living costs inflation in Thailand – something Bangkok Pundit has recently covered in another blog post. My view is that food inflation could potentially be the spark that causes a far more dramatic conflagration than what even occurred in Thailand in 2010.  The head of the IMF, Dominique Strauss-Kahn, has warned Asia of the potential harm inflation could cause.

Diesel subsidies are also discussed by FM Korn MP – something which are now back in the spotlight as a divisive and contentious issue, with Korn now seemingly leaning towards the lifting of the subsidy.

But it is on the issue of military spending that Korn is at his most candid and explicit with the Finance Minister making some unusually strong statements regarding the cost of Thailand’s military.

Finally, Korn gives some comment on Map Ta Phut and on future investment in Burma – both deeply contentious issues for domestic and international audiences.

Thai Finance Minister Korn Chatikavanij. Pic: AP.

The head of the International Monetary Fund, Dominique Strauss-Kahn, recently made some predictions regarding food inflation and its potential to have a devastating impact in Asia. More recently there have been some widely reported problems in Thailand with basic food products and particularly with cooking oil. So, in light of Strauss-Kahn’s comments and your own ministry’s predictions regarding inflation, which you put at 3.2.% to 3.7% and also said may be higher if fuel prices go up, what, in your opinion, is more of a threat to Thailand’s stability, the Red Shirts, PAD/war with Cambodia or food inflation?

It’s difficult for me to answer in that way. From my perspective the high cost of living is a big issue. The good thing in Thailand is that, number one, we are a big beneficiary as we are a major food producer, so agricultural income is high. In the south rubber prices are at a record high. In the northeast, tapioca prices, where they are at the moment, is also extremely beneficial, sticky rice price is good, hom mali [fragrant rice] price is not as good as it should be but you get helped by the government price guarantee scheme. Agricultural income levels are good. Actually, the people who are hurting more are the urban dwellers and consumers, who don’t have the benefits derived from higher food prices. That is problematic as it is also the Democrat Party’s support base. So it is a challenge for us.

From an economic policy perspective, and you can ask this of any government, tackling inflation is much harder than tackling deflation. So two years ago, when we came on board, and there was a lack of demand for our goods from overseas as a result of the global economic crisis, that was a problem. But it was relatively easy problem for us to solve. We could do it through fiscal policy or through monetary policy and expect relatively fast results. But with higher prices you don’t have the tools. The monetary policy is controlled by the Bank of Thailand and, in any case, the economic impact of monetary tightening carries a significant time-lag. So we just have to make sure that from our side not to add fuel to the fire and we’ve scaled back on our spending programmes, which is consistent with our plan to achieve budget balance in five years. The Ministry of Commerce has a tough job on maintaining price control on certain goods. But, as you can see, once you assert price control on certain goods, what sometimes happens is that these goods completely disappear from the shelves because the producers are not willing to sell at that price. You can only fight reality to a degree. What you need to make sure, as a system, is that there is enough competition to make sure people are not profiteering from high prices. Most countries now, and given the amount of money everyone was printing, especially the USA, over the last couple of years, inflation was always going to come knocking on the door.

Having looked at context of Egypt and Tunisia where food prices have been cited by the IMF as one of the reasons why unrest has been sparked and I just wonder, when looking at the whole context of what has been happening in Thailand in terms of social unrest, that if you throw food inflation into the mix, is that it effects everybody, including, as you acknowledged earlier, your own voter base. When you look at those people who are on 10,000 to 15,000 baht a month (US$330-490), just at the bottom end of middle income, they are the people who will be effected most by price rises.

That is exactly the right line to draw. When we look at people who need assistance we draw the line at 15,000. It is precisely the reason why we have to use some unconventional policies. The purists don’t like the fact that we are using the oil fund to subsidise diesel fuel. Yet, when we came into power the oil fund was negative to the tune of 7 billion baht. We now have it running at a positive of 27 billion baht and this fund exists exactly for this purpose. So if we don’t use it now, when can we use it? We specifically targeted it at diesel because it as an economic fuel and precisely because higher diesel will lead to higher transport costs and that will have an immediate knock on effect on the price of goods. The aim is not to subsidise fuel as such but to avoid fuelling the cost of living burden.

So you’re using diesel subsidies as a mechanism to, hopefully, reduce inflation?

Exactly. And it’s not affecting the budget because we are using the oil fund surplus and can do so for some time. We can’t fight the trend for ever but at least for the winter season we wanted to see what happens to the oil price. We will make our decision in March or April as to whether we will continue.

Pracha Wiwat [a recently implemented welfare programme] is also a measure we will use to increase income and reduce the cost of living for those in need. To provide greater social security and so on. But all of it is address the quality of life issues that have been raised as a reason for social division and to strengthen the grassroots economy which I think will enable our economy to grow in a more sustainable manner. There’s a sense we’ve have good GDP growth, stock market is great, corporate profits are up but benefits are not fairly shared and I am a firm believer that they should be. I’ve made some significant changes at the ministry in order for them to be able to focus more on the grassroots economy and not just the macro level. In fact, there is no civil service group within the Ministry of Finance at all that is mandated to look at the grassroots economy. So I have created a new department specifically to look at issues related to, for example, access to credit, and so on, simply because, as recent lessons have taught us, unless we are serious about addressing these issues, the equality issue could be a major stumbling block for us attaining the goal of sustainable growth.

My thoughts are that with prices creeping up a few percentage points the disposable income that those on 10,000 to 15,000 baht a month maybe spend on a daily bowl of noodles is being eaten into. And then the noodle vendor stops selling as many noodles as they used to and it just….

It just spirals. People on salaries are certainly hurting more. Farmers are less affected simply because the price of products are good and government schemes ensure they are compensated properly. During the floods last year we completely changed the way that compensation was paid out. When we first took power we were handling payments for damage claims from drought that took place two years before and still hadn’t been paid. The red tape was just incredible. This time around, with the floods, we changed the system and increased the amount based on cost and damages and paid it directly into people’s accounts. We did something that wasn’t done before. We wanted to ensure that everything was received by the individual recipients with no leakage along the way. And we wanted it done quickly. There are a lot of short term issues that this government are having to deal with. It is a challenge for us to retain our focus on reform issues and investment projects that we believe that Thailand needs in the long term. So it is difficult and challenging.

Referring to the reported level of investment in the Pracha Wiwat programme of 2 billion baht (US$65.6m) a year…

That’s totally wrong. It’s more. Well, that’s right for the first year anyway.

Well the Bangkok Post state that it is 2 billion baht.

Okay, okay. Roughly.

And I am referring to the level of Pracha Wiwat investment in this next question as it seems quite a surprising state of affairs to an outsider such as myself when set against payments in other areas. For example, when we consider the amount of money put aside to spend on Privy Council president General Prem Tinsulanonda’s new cavalry unit in Khon Kaen, which costs 70 billion baht (US$3.3bn), equivalent to 35 years of the Pracha Wiwat welfare programme, and a military project that some commentators consider to be something of an unnecessary vanity project, I must wonder, and speaking very much as an outsider on this issue, but also having observed other grandiose spending, is military spending out of control in Thailand? And, given all the reforms and changes you are talking about, when are Thais going to be able to ensure they get the best value for money from their military? Setting 2 billion baht against the military spending seems very small.

First of all be careful with the numbers a little bit. Pracha Wiwat is just a sliver of what we do in terms of welfare. Income guarantee for farmers is over 40 billion baht. Free education is another 30 to 40 billion baht. We pay 500b aht to elderly people who don’t have a pension that, again, is tens of billions of baht. If anything we’re criticised for being too generous on welfare. Pracha Wiwat is different in that these are measures that are designed to put things right without having to necessarily rely on taxpayers’ money. For example, the reality that tens of thousands of street vendors are trading in illegal spots, even though they’ve been trading there for decades and these spots remain illegal, frankly speaking, simply because, that it is profitable for city councillors to keep them illegal so that they can extort payments in return for turning a blind eye. We went through this Pracha Wiwat process in looking at every single street vendor spot and basically assessing whether they should be legitimised in order to reduce that kind of cost to the vendors. We fought tooth and nail, actually, with the Bangkok Metropolitan Authority (BMA) and the BMA played along but there were certainly some elements who were trying to hold onto their source of revenue. We ended up, at the first stage, agreeing to 200 additional spots to all almost 20,000 vendors to become legitimised. And that doesn’t cost money. Ask the individual vendors if this is something that helps. For them it is manna from heaven. And once they’re trading legitimately it allows them to access cheap loans from the state banks, reducing their need to depend on loan sharks and essentially improving their economic status. Likewise there are similar schemes for taxis, motorcycle taxis. And again these are the kind of things that need tweaking structures and not needing to use the budget. As I said it is separate.

As for the military, first of all I have no idea about the Khon Kaen thing. For me I am a liberal. The less money we need to spend on the military the better, as far as I’m concerned. But if we are going to have a military and of course we need to have a military, then they need to be properly equipped. And on that basis we need to be willing to spend money to ensure that we’re getting the best value from our military. Beyond that we need to make sure that the military budget isn’t taking away our ability to look after the people.

Just onto another issue and particularly that of the Map Ta Phut ruling and the debate of environment versus development. Questions have been raised about how the ruling may effect inward investment – do you have any thoughts on maintaining the tricky balance between environment and the economy?

I think it is as result of growing pains that happen in most economies that are moving from developing to a more developed status. I also think it reflects on the strength of our democracy. The way we found a solution was also something that was interesting. We recently met with a Japanese business group and that’s what they were saying, that every country has problems and it’s how you solve these problems that is the real differentiator. We solved it in a timely manner and in a very democratic manner, because we did it in the only possible way, joining government, NGOs, academics and business in making a negotiation. There is now greater clarity for investors and more security for the population. Broadly speaking, we probably have to stop talking just in terms of Thailand. The reason the country is spending quite a lot of money in helping Myanmar (Burma) develop, for example at the new port city of Tavoy, is because that is where our industrial growth is likely to be in the future and not within Thai borders.

That’s no bad thing. We have got to start looking at ASEAN as one, rather than feel confined to just making plans within our own borders. If we are able to begin thinking that way then I think the potential for all ASEAN nations will be exponentially larger. I think we’re handling the entire thing in a balanced manner and we’ve also, in that process, won the confidence of the investors in our country.