The Challenge of stimulating the Economy effectively

Many sectors are now requesting government measures to stimulate the economy and restore consumer and investor buoyancy amid a growing lack of confidence in the economic situation. This is due to a continuous slowdown in consumption and investment, which will potentially cause the gross domestic product (GDP) to expand less than 4 per cent in 2007.
Some academics propose fiscal and monetary measures for economic stimulation, allowing economic management to proceed coherently. Differing on this, the business sector has demanded some downward adjustment of the policy rate by the Bank of Thailand to counter Baht appreciation and stimulate domestic consumption and investment.
Thus, the Finance Ministry has prepared economic stimulation measures to increase the purchasing power of the realty, electronic, and automobile sectors, and to expedite budgetary disbursement through local administrative bodies, promoting job creation, and maintaining value added tax (VAT) at 7 per cent for another year.
I consider fiscal and monetary policy useful and necessary to economic stimulation, both to lower or fix the policy interest rate and to keep the land transfer fee low. However, it may prove inadequate to present economic problems; galvanizing consumption effects, but failing to fuel investment significantly. This is due to the prevalence of political uncertainty and lack of confidence in government economic management; governmental administrative efficiency being the clearest indicator of budgetary disbursement success.
Substantially lowering the policy rate in one move may cause massive capital outflow and currency fluctuation. Though somewhat positive macro-economically, its impact on the micro economy would likely be destabilizing, with little justice achieved and some groups standing to lose, particularly those with income from bank savings, debtors repaying fixed rate loans, importers, and those with foreign debt to pay.

So, how should the government stimulate the economy effectively, given the current political challenges and lack of confidence in their administration?

In my view, the public sector must play the role of major investor. While stimulating public consumption and spending may be necessary, it is not as effective for economic stimulation as investment is. Where private sector investment slows through weak confidence, the government should expedite investment projects and clarify project implementation priority, budget, and timeline.

Due to a lowered policy rate likely causing excess liquidity, the government should participate to absorb it, channeling capital to investment. The public, still lacking confidence in Thailandrsquo;s economic and political situation, dares not invest or spend on durable goods despite an all-time low interest rate. Thus, the government should increase public savings options by issuing bonds to amass capital for public project investment.

Lastly, government measures should prepare to cushion unemployment impacts among new graduates and the unregistered labor force. Government job creation is an inefficient approach. Similarly, government social services and assistance, while sometimes necessary, do not generate long-term benefits. Therefore, specific budget should be allocated to develop labor skillsmdash;by reducing taxes on educational and training services, or by giving tax holidays to companies with substantive employee training. Such measures will stimulate investment in human capitalmdash;and certainly be more productive than merely spending on consumption.
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