Subsidies fuel Thailand's economic woes
The reasoning behind Thailand's fuel subsidies seemed straightforward enough. By capping prices on fuel, the government believed it was keeping a lid on inflation and protecting the economy from volatility. The unintended consequences, however, have proven difficult to handle. And before it is all over, the Thai government will have been treated to a lesson in the folly of tampering with a market that is best left to run itself.
As the price of oil has hit one record high after another, the subsidy burden has grown. Since the beginning of the year, Thailand has paid out about half a billion US dollars to keep diesel at about three quarters of its market price. Meanwhile, artificially cheap petrol is encouraging Thais to fill up their tanks, fuelling a surge in oil imports and the country's trade deficit. Concerns over the hit to the treasury have in turn caused jitters among international investors and a drop in the baht - which has raised the cost of imports and further widened the trade deficit.
The inflation the government was trying to curb has made an appearance anyway - only now, Thai leaders are stuck with a consumer subsidy that will be difficult to dismantle. They have already signalled that the petrol price support will stay until next February, by which time the bill will have at least doubled.
There is no assurance that import prices will ease greatly between now and the end of the year, while efforts to curb energy use - for instance, ordering shopping malls to close early - may cut into economic growth. Refineries are already being asked to cut their margins and may find it more profitable to sell to neighbouring countries, leading to tighter supply and higher prices. In the end, the fuel support has proven to be both economically irrational and environmentally damaging.
It is interesting that Thailand did not bother to learn the lessons of Indonesia's flirtation with subsidies, which illustrate how difficult it is to take away or even adjust the price supports once they are in place. President Megawati Sukarnoputri's attempt to raise controlled prices last year led to demonstrations and calls for her resignation. With a presidential election under way there now, chances are slim that the policy will be changed, even though Indonesia is experiencing the very same squeeze between import prices and domestic ones.
For Thailand, the burden could grow if there are any disruptions in supplier countries. Perhaps higher prices will convince the government to bring the subsidy programme to a swift end. Since Bangkok is in the middle of an election season of its own, it will take a lot for the government to act. If and when it does, the benefits would include more people leaving their cars at home and taking advantage of the underused new subway system. The return to rationality could not come too soon.
