Will de Soto’s ideas work in Thailand?

Our dear prime minister, Thaksin Shinawatra, appears to have never run out of grand ideas to help the poor. As his administration is heading towards its third year in office, he is mulling yet over another high-minded programme to uplift the plight of these people.

This time, he thinks the administration could inject a significant amount of fresh capital into the livelihood of some 40 million poor souls by converting their rights to certain kinds of property into assets.

Obviously, the premier is driven by the intellectual power of Puruvian economist Hernando de Soto, who argues that poor people are not as impoverished as many think. He urges governments of developing countries to unleash the poor's economic potential by revitalising the so-called "dead or untapped capital" and welcoming them into formal sectors of the economy.

De Soto also argues that the poor, who are currently struggling largely in the informal sectors of developing economies, are capable of participating in the world of free-market competition and can even achieve prosperity in a capitalist economy provided that governments realise the latent significance of the assets informally belonging to the poor, most of them in the form of property.

De Soto's idea is hence translated into the grand scheme crystalised recently by Pansak Vinyaratn, the prime minister's chief policy advisor. According to Pansak, this scheme has the potential to eventually bring about 40 million Thai citizens under the income tax system, which currently covers only 31 per cent of the total 63-million population. This is mainly because poor people will be given the opportunity to convert their current status of certain kinds of property rights into collateral, which can then be used to borrow money from the banks, presumably state-owned banks, for investing in productive activities that will generate income to pay back the debts.

Among these rights as identified by Pansak include the right to use land plots under the Sor Por Kor 4-01 scheme (which are currently not transferable and cannot be used as bank loan collateral), the right over "illegal" residence on encroached state land plots or inside Bangkok's large congested communities such as the Klong Toey slum or the right over fresh market stalls nationwide.

"[Based on the estimated 40 million citizens who are currently outside the tax system], if each of them manages to get additional income of Bt100 per month, the country's savings will increase by Bt4 billion per month. Currently our poor people have no or very little access to capital so they have no money to start up their own productive activities," he was quoted as saying.

Pansak cited the congested Klong Toey community as an example of one in which thousands of households have house registration numbers, schools, healthcare units and the right to vote, but the people are still considered to be "illegal" residents, making it difficult or impossible for them to enter into legally-binding contracts such as obtaining loans from financial institutions.

Without the effort to convert their existing rights into assets, these poor people will always be stuck with loan sharks charging exorbitant interest rates.

Pansak hopes the idea will lead to the creation of new legal, financial and other facilities that will eventually allow these people to have access to capital on condition that the money be used for productive purposes.

The first hurdles for this grand idea are obviously the legal and ownership issues which will have to be sorted out before any legally-binding documents could be issued to the poor so that they could use them as bank loan collateral.

At this stage, it seems that the government intends to create "second-tier" papers to facilitate this scheme since most of the properties mentioned already have owners such as the state. So government legal experts will probably have to go to the limits to "legalise" something illegal like "illegal" residence on encroached state land plots.

Another issue is which banks are going to lend the money to these people once they have the papers. The guess is that state-owned banks will be first directed to do so while privately-owned banks are likely to stay on the sidelines.

Third, how could such a credit scheme be managed to ensure that the loans are sound and payback is highly likely.

Prior to this de Soto-driven scheme, the government had launched the Bt77-billion village fund programme giving each of the 77,000 villages nationwide Bt1 million - shortly after it won office with a comprehensive range of populist policies. So far, it is said that most of the money is still revolving around the villages because of a low rate of bad loans since most poor people do not cheat.

Given the prime minister's zeal to test new ground in development models, the administration should be given the benefit of doubt over its latest scheme at this stage.