Governments have a crucial role in providing a free and fair market. FNF Thailand intern XX Yatawee examines how well the Thai government performs.
7.6 Minutes Yatawee Sangsukiam
Historically, market economies have been existing for centuries in various forms. People used markets as a medium for people to trade even before money was invented.
Adam Smith introduced the idea of a free market into economic policies. His metaphor of “an invisible hand”, which he used in his books such as an “Inquiry into the Nature and Causes of the Wealth of Nations” in 1776 and the “Theory of Moral Sentiments” in 1759, became famous. The metaphor refers to the hidden force that drives the free market through individual actions and interests. This leads to more benefits than in a planned system commanded by a central government.
Liberals emphasize the value of economic freedom. They believe that individuals should have the freedom to invent, create, accumulate and exchange goods. Economic freedom is believed to be the best mechanism for accumulating wealth. It allows people to have and peruse their individual interests. By realizing them, they not only satisfy themselves, but also help the society. Smith said: "It's not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their interests."
Any market economy is based on the dynamic of demand and supply. The relationship between both creates the so called price mechanism. The mechanism automatically leads to an efficient distribution of resources. Entrepreneurs try to make profits and consumers try to get the best value for their money. Business that succeed are able to reinvest in the future. On the other hand, failing businesses must improve their products and services - or they are being pushed out of the market.
However, a ‘free market economy’ is more a theoretical concept. In the modern societies, states have evolved to become complex communities, consisting of various actors. Consequently, there is the need for limited government intervention. Especially democratic administrations have been implementing a mix of both free market economy and commanded economy. The main question is: When is state intervention is needed? Liberals tend to answer this question with: As little as possible and as much as necessary.
In order to maintain the existence of a market economy, there are six necessary components.
Inflation creates instability and fear. This uncertainty undermines the ability to assess and predict situations for both companies and consumers. They are not able to make efficient decisions or to plan. This limits their business activities and slows growth.
The key principle of a market economy is the mechanism of demand and supply. Thus, people should be allowed to purchase, sell and produce goods how they want and where they want. Contrastingly, a closed market is supposed to protect domestic businesses from international competition. However, this has side effects: fewer competition means higher prices for consumers and less incentive for domestic companies to innovate.
If property rights are not enforced, the government, hostile individuals or powerful groups can forcefully take property. In that case, political drives rather than economic ones allocate resources. This leads to inequality and inefficacy.
In a market economy, people and businesses must be able to choose according to their preference and purchasing power. However, in terms of labor contracts, unlimited freedom could allow employers to exploit laborers. The government needs to enforce some regulations for workers’ protection.
Rule of law is an important ingredient of a true market economy. The judicial system must ensure that contracts can be enforced. It is supposed to operate independently from the influence of the government and people who hold political and economic power.
The government needs to provide economic, social, and political stability. This enables investors, businesses and consumers to plan and make efficient decisions. In conclusion, a market economy cannot operate without some level of state intervention. Vulnerable groups must be protected and the government is needed to enforce policies and regulations to ensure a fair competition. On the other hand, overregulation always threads innovation and competition.
Most liberals see a need for state intervention to sustain markets and to ensure a fair competition. In an unregulated market, one business could get a large portion of a market share that smaller business cannot compete anymore and the consumers lose choices. The state must avoid such a situation, which is called a monopoly.
Vulnerable groups should be protected. This can be in various forms such as pensions or insurance systems. These schemes aim to help people in need. To support them might also be beneficial for growth as the purchasing power is remained which will keep the market running. People, especially children and students, should be enabled to unfold their full potential.
Some products might not be sufficiently provided by the private sector. An example is essential infrastructure, such as roads. Providing those goods directly or indirectly enhances productivity and the competitiveness of the national economy.
Business activities, such as production, can lead so called “externalities”. For example, burning coals leads to fine dust, which causes health costs to the public. To internalize the costs into a market economy, a state should regulate or tax possible pollution.
Thailand has been implementing a mixed economic system. The economy is considered to be free and driven by the price mechanism. The state provides infrastructure. Although the Thai economic system does not have a clear definition like the social market economy of Germany, it can be considered as a mixed economy comprised of socialism and market economy leaning to the latter one.
The Heritage Foundation has been providing "Index of Economic Freedom" for 27 years. The index covers 4 groups of freedom as follow;
1) Rule of Law : property rights, government integrity, judicial effectiveness
2) Government Size : government spending, tax burden, fiscal health
3) Regulatory Efficiency : business freedom, labor freedom, monetary freedom
4) Open Markets : trade freedom, investment freedom, financial freedom
On the current index, Thailand ranks on place 42. According to the Heritage foundation, the rule of law in Thailand is weak. Corruption, bribery, cronyism and nepotism are common. The judicial system is supposed to be independent, but the courts are trapped in conflicts of interest and political influence.
According to the 2021 index of the Heritage foundation, Singapore is ranked at the first place. It is followed by New Zealand, Australia, Switzerland, and Ireland. These countries share some similarities such as strong property rights, security of contracts, transparent government, independent judicial system, support on local business, competitive financial sector, labor protection, and openness to global trade. In the same year, the lowest five ranks consist of Zimbabwe, Sudan, Cuba, Venezuela, and North Korea. They share some common characteristics such as weak rule of law, state interference, weak property rights, labor issues, inflation, and corruption.
Hierarchical Capitalism
Let’s take a closer look on Thailand. According to the scholars Prajak Kongkirati and Veerayooth Kanchoochath, programs and regulations since 2015 reflect the tight relations between the Thai conglomerates and the military government. In this kind of system, hierarchy often biases interactions in the market.
"‘hierarchical capitalism’, characterized by their crafting of a hierarchical mode of economic participation and reinforcement of power asymmetries in the economy, in the circumvention of a ‘level playing field’ competition."
(Kongkirati and Kanchoochath, 2018).
These practices cause unfair competition and result in long terms issues such as inequality, weak freedom of contract, oppressed labors, monopolization of customer’s choice and slowed innovation.
Anti-trust Policy
The enforcement of anti-trust policy is notably weak in Thailand and there are monopolizing activities in many sectors. One example of concentrated market power is liquor production, which is highly centralized within a few major companies. In the past, businesses required a high investment and special technologies. The advancement of production process has allowed more people entry this business. As a result, there are more products like craft beer and community liquor. Nevertheless, strict rules harm the competitiveness of the minor producers and cause high entry barriers to the market. As a result, small breweries are criminalized and they have to move production out of the country.
Another example of a weak anti-trust policy is the merger between CP Retail Development Co and Tesco Stores. The state authority confirmed that this deal will not affect the people nor the monopolization of retail business. However, some experts fear that the merger could lead to concentrated market power in retail business harming competition and thus the consumers.
Labor or trade unions are a legacy of the October 1973 uprising when protesters demanded the right to establish labor associations. Today, unions are no longer as popular and effective as in the past. Mostly, unions exist in the industrial sector, but not in other kind of businesses. As a result, the bargaining power of laborers in Thailand has been weakened, especially those who are outside of the system or work in the platform economy. The big companies such as Lineman, Grab, Foodpanda, and others successfully adopt the trend of digitalization, while the regulations in Thailand could not follow and thus leave workers unprotected.
Here is the need of a reformation of labor laws. Furthermore, inadequate education undermines the growth of economy and widens the inequality in the long run. If not improved, Thailand won’t be able to climb up the value chain. In that case, companies cannot pay higher wages to their workers.
In conclusion, Thailand’s economic system is operating based on the free market approach with some state intervention. The state has been able to provide some basic components such as fundamental infrastructure and social security. Nonetheless, it is not truly free as the government has been exercising its power in designing the economic structure and regulations against the norms of free market economy.
The Thai government has not been emphasizing its roles on the area of anti-trust policy and environmental protection enough. There is not efficient enforcement on controlling the market share of the large companies. At the same time, the small businesses are also not fully supported whether though financial aid or laws. Furthermore, laborers can be easily exploited. This weakness can undermine the livelihood of the people and economic development in a long term.
