If you believe that all politics is local, you will have to apply that to economics as well. Bank of Thailand Governor Prasarn Trairatvorakul spoke at a Harvard gathering recently about why what happens in the "emerging markets" matters. His main take: ultimately, growth depends on what happens at home. "External conditions alternately provide headwinds or tailwinds," he said, "but the ability to counter or take advantage of these shifts is determined by domestic capabilities. Now, some of you may think of endowment of resources, such as land and labour, as the most fundamental domestic factor. And you are right. Factor endowments do give some countries a head start over others. Oil exporting countries are a prime example."
But Prasarn went on to argue that the long-run prosperity of nations is not bound by their endowments. He cited a recent Time magazine article that carried this story:
The Netherlands is Europe’s largest exporter of tomatoes. One of the most critical ingredients in growing tomatoes is sunshine. Holland is cold and gets little sunshine. Greece is hot and has plenty of sunshine. Yet the Dutch can produce 70 kilos of tomatoes per year per square metre of temperature-controlled greenhouse while Greek and other Mediterranean growers get approximately 7 kilos on traditional open-air farms. Ironically, in the summer, Greece imports tomatoes from Holland because local farmers are unable to grow enough during the hottest time of the year.
Prasarn’s point should be well taken: natural and geographical constraints can be overcome. He said Japan and Singapore spring to mind as countries that have made much of their limited resources.
That obviously means that how a country makes use of, and develops, its own resources is critical to long-term growth. It also means that factors of production need to be reshuffled constantly. "Workers, capital and land have to be devoted to activities that generate the most added value for the economy. In other words, growth requires structural change. Advanced economies are simply not blown-up versions of developing economies. They are structurally different," he said.
In Thailand’s case, the central-bank governor said, the average worker in the manufacturing sector is roughly 10 times more productive than his counterpart in agriculture. "Yet the latter sector employs about 40 per cent of our workforce compared to 15 per cent in manufacturing. It is easy to see that simply moving workers from agriculture to industry could lift our income tremendously. In fact, this was precisely one of the key drivers of Thailand’s growth in the 20 years prior to the 1997 financial crisis. During that time the share of employment in agriculture fell by a third, releasing workers to the more productive manufacturing and service sectors.
"Thailand’s experience is quite typical of many others in Asia," Prasarn said, adding that sustaining growth in emerging-market countries hinges on the continuation of this process of "change and upgrading".
But sustained growth can be achieved only through removing the "bottlenecks" that impede such transformation, he said.
The key fundamental capabilities include macro-economic stability, the rule of law, good education, strict enforcement of contracts, a competent bureaucracy, good governance and low tolerance of corruption.
Thailand remains weak on all those main requirements for sustainable growth. We don’t have those "fundamentals" because we don’t have strong institutions.
And this is how Prasarn put it: "These [fundamental capabilities] are often encapsulated under the rubric of strong institutions. One can think of institutions as the set of rules and norms that both govern the incentives of economic agents as well as constrain their behaviour. Good institutions encourage growth. Bad institutions stifle it. Entrepreneurship, a critical driver of structural change, relies heavily on the institutional environment."
His conclusion was spot-on: "To move forward, there needs to be a collective change of attitudes and mindsets – particularly toward things like corruption, good governance and consideration for the public good."
The central-bank governor might have been addressing a Harvard gathering, but he was actually confirming the fact that all lectures are local, after all.