Comment on “Global Financial Crisis andASEAN: Fiscal Policy Response in the Caseof Thailand and Indonesia”

Yoichi NEMOTO†ASEAN+3 Macroeconomic Research Office (AMRO)

JEL codes: E62, H20, H30,

Sangsubhan and Basri (2012) provide a detailed account of fiscal measures implementedby Thailand and Indonesia in response to the global financial crisis (GFC), and analyzethe effectiveness of expenditure versus revenue-based measures in delivering GDPgrowth. They find that while the GFC’s impact differed in each country, both countriesentered the crisis with sufficient fiscal space, providing room for fiscal support for theirrespective economies. In Thailand, while targeted measures on expenditure were deemedeffective, they were untimely, particularly when compared to quasi-fiscal measures suchas credit expansion via specialized financial institutions. In Indonesia, in an environmentcharacterized by lags in disbursement, tax cuts were deemed more effective than expen-diture. However, their effectiveness diminishes when the tax cuts are targeted at thehighest income earners or corporates. Sangsubhan and Basri conclude by noting the riskof a new normal of ‘stimulus expectations’ built into budgets which prevent fiscal bal-ances from returning to their pre-crisis levels.

This phenomenon has not been exclusive to these two countries. Both advanced andemerging markets have pursued expansionary fiscal policies, leading to narrower fiscalspace across the board. Public debt-to-GDP ratios in the Eurozone economies have risento levels well above 60 percent, with limited scope for consolidation in view of the size-able budget deficits and the likelihood of GDP contraction in some economies. In EastAsia, public debt-to-GDP ratios have also risen, with average public debt levels in theASEAN-5 countries standing at around 46 percent of GDP, and expected to decline onlygradually over time.1 In the light of the narrowing fiscal space and increasing fiscaldemands, the need for effective policy becomes ever more critical.

In tackling the question of effectiveness, Sangsubhan and Basris consider revenueand expenditure-based stimulus measures. In both Indonesia and Thailand, the relativelylower efficacy of expenditure-type measures stems from their longer implementationperiods. Delays in the absorption of expenditure are becoming increasingly commonamong the major ASEAN economies due to delays in absorption, and a greater demandfor rigorous public resource management and accountability, as well as tighter regulatoryand environmental standards for large investment projects. Despite the importance ofstrategic fiscal spending in emerging markets in the form of gross fixed capital formation

†Correspondence: Yoichi Nemoto, AMRO, 10 Shenton Way, #11-07 MAS Building, Singapore

079117. Email: yoichi.nemoto@amro-asia.org

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doi: 10.1111/j.1748-3131.2012.01243.x Asian Economic Policy Review (2012) 7, 270–271

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research270

and infrastructure investment, there is a risk that revenue-based stimulus is preferred toexpenditure-based stimulus on account of this perceived ineffectiveness. As pointed outby Budina and Tuladhar (2010),these longer-term investments tend to be overlooked infavour of stimulus measures that can be more quickly absorbed into the real economy,but have only short-term effects in boosting consumption. Policy measures such as theimprovement of land acquisition laws need to be explored even in peacetime.

While the immediate need for fiscal policy support seems to have diminished some-what, developments in Europe and elsewhere will still need to be monitored carefully.Although conventional indicators do not suggest debt sustainability is an immediatecause for concern, East Asia remains vulnerable to shocks from advanced economies and,therefore, must manage its fiscal space and policy adjustments well. Any departure fromfiscal policy support would need to be carefully evaluated with the following three con-siderations in mind.

Firstly, in the short term, fiscal stimulus measures must be rolled back. In practice,however, revenue-based measures (tax cuts) are usually semi-permanent in nature andare difficult to unwind. Expenditure-based measures, in particular, discretionary spend-ing, can be difficult to phase out, particularly if they take the form of pre-committedsubsidies. In both Indonesia and Thailand, the removal of these subsidies (for example,fuel subsidies) have implications for inflation and can be politically sensitive. For themajor ASEAN countries, however, implementation delays inherent in such expenditure-based measures could turn out to be a blessing in disguise, making exits easier.

Secondly, it is important that medium-term plans for strong, sustainable and bal-anced growth must include prudent public debt management to ensure ample fiscalspace for counter-cyclical policy responses to future shocks. A medium-term plan whichis well communicated to the public is critical to ensure the credibility of medium-termdebt sustainability, and to prevent a deterioration in fundamentals should interest ratesor liquidity pressures rise. This will prove crucial as East Asian countries are looking tointroduce and improve their social security systems in the near future.

Thirdly, as has been highlighted in the case of Greece, the accuracy and credibility ofdata as well as the transparency of public finances need to be closely monitored andimproved. Improved transparency will contribute to a clearer recognition of publicliabilities, namely off-budget expenditures, government guarantees and expenditurethrough state-owned enterprises.

Note

1 Based on actual 2010 figures taken from the International Monetary Fund and national authori-

ties. ASEAN-5 is Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

References

Budina N. & Tuladhar A. (2010). Post crisis fiscal policy priorities for the ASEAN-5. IMF Working

Paper No. WP/10/252.

Sangsubhan K. & Basri M.C. (2012). Global financial crisis and ASEAN: Fiscal policy response in

the case of Thailand and Indonesia. Asian Economic Policy Review, 7 (2), 248–269.

Yoichi Nemoto Comment

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research 271