By Jacques-chai Chomthongdi^*

In the last two decades, the role of financial sector in the world economy has changed dramatically. Deregulation of national financial sector and capital account liberalisation, together with "re-regulation" in favour of capital and finance has resulted in the financial sector taking on a life of its own unrelated to the real economy. "Instead of being a means to an end, it began to be an end in itself…[as a result] the volatility of the world economic system and the frequency and magnitude of financial crashes have amplified".

The integration of national economies into the global financial system through the current form of liberalisation has led to the increasing vulnerability of developing countries. The experience of East Asian countries clearly reveals that, in most cases, the structure of foreign capital flows into the region altered after the financial liberalisation took place - from the domination of long-term foreign investments to short-term corporate and bank foreign borrowings. In Thailand alone, the level of short-term private external debts increased sharply from US$ 29 billion in 1994 to US$ 41 billion in 1995 . The large volume of short-term capital inflows (both speculative and unspeculative) increased the volatility in financial markets and the rapid, large-scale outflow of capital in 1997 triggered currency and financial crises across the region and beyond. As it is evident in various reports, this late 1990s financial crisis (similar to others in the past) has resulted in the hardship of people in crisis countries. In addition, small and medium size businesses died out and many of the larger enterprises were either bought out, or heavily invested, in by overseas investors and transnational corporations.

This situation has been exacerbated in crisis countries that went through the neo-liberal International Monetary Fund (IMF) programme. The strict fiscal and tight monetary policies were implemented in the attempt to attract foreign capital. Foreign investment and export earning were to be the main engine of growth and recovery in the expense of local people and businesses, particularly small businesses. In 1998, up to 1,000 small and medium size businesses in Thailand closed per month, leading to a drastic increase in unemployment and a decline in domestic purchasing power. More than 20 million people in the three Asian countries under the IMF programme - South Korea, Thailand, and Indonesia - dropped below the poverty line in the space of less than two years.

The international financial institutions (IFI) programmes also led to a new form of national debt. In South Korea, Thailand, and Indonesia, between 1997 and 2000, while the amount of private debt reduced, national (that is public) debt surged in each country by 10.2 per cent, 36.2 per cent and 70.0 per cent, respectively. National debt of this type – which has not been incurred by the public or can be said to directly benefit the public -- not only diminishes the countries’ capacity to mitigate unemployment and other social problems related to economic conditions, it also severely constrains policy choices. Countries are forced to both maintain and expand exports in order to generate hard currency receipts and to adhere to the prevailing economic orthodoxy.

At the micro level, small-scale rural producers provide a very interesting example of how micro-businesses are excluded through the market economy. Let us use the experience of Thai farmers as a case study. Theoretically, and probably in practice in the pre-market economy, farmers as micro-business operators had the ownership and the ultimate right to manage their land, labour, capital and other resources to achieve their own objectives. The penetration of the market economy into the rural areas has resulted in the shift of decision making power from the majority small-scale producers to other actors in the market. In Thailand, particularly in the early part of "development" under the guidance of the World Bank, governments played an important role in the introduction of the market economy. Farmers were encouraged or sometimes forced to shift from subsistence production to cash crop production directed by the market demand. This change began at the same time as the green revolution in which new high-yield varieties that required high input were introduced. This type of production increased the farmers’ need for credit to finance each production cycle. Although the government through the Bank of Agricultural Co-operative (BAAC) provided farmers with "low interest rate loans", farmers have to earn a profit at least equal to the interest that they have to pay on their investment, which means 9 to 12 per cent for most farmers. Moreover, a large part of them who could not access the formal lending system have to borrow from informal lenders at the interest rates as high as 6 per cent per month. Government statistics show that between 1953 and 2000, rural households that were formally indebted rose from 20 per cent to 88 per cent, and the amount of debts increased 4 times per household.

The decision-making and bargaining power of small-scale producers have an inverse correlation with the level of indebtedness. In many cases, the choices of what to produce and what input to use lie with the creditors, both government and informal creditors. Furthermore, farmers are pressured to sell their rice or other products soon after the harvesting season to repay debts even though this is the time when prices are lowest. This makes it virtually impossible for farmers to escape the vicious cycle of debt.

This problem intensified after the financial crisis when the government pushed harder on the exportation of agricultural goods. In just three years, between 1996 and 1999, net income per rural household declined and the amount of debts increased by 50 per cent.

Although a devalued baht made agricultural exports more competitive, it increased volumes of agricultural exports but not earnings, and in any case devaluations were happening everywhere – South Africa, Brazil, Vietnam, Indonesia, Philippines, etc, so the benefits were minimal. At the same time cost of inputs such as fuel and fertiliser went up. In any case terms of trade are declining.

A significant channel which pulls resources and wealth from the rural areas is the unequal exchange between cheap products from agricultural sector with more expensive goods from industrial and service sectors. Therefore, micro-businesses either at the household or community levels need to have a more inward-oriented approach or move towards a self-reliant position in order to maintain their autonomy.

One of the interesting micro level alternative financial systems which emerged in rural Thailand is the community currency system. A group of five villages in "Kud Chum" District, in the north-east of Thailand (Isaan), developed and started to use its own interest-free currency (the ‘Bia’) which cannot be converted with the national currency. Different from the local currency system in the other parts of the world, this "Bia" system was not the consequence of a sudden economic recession or the increase in unemployment. It was the awareness of the danger of being too dependent on the market. Stepping back from the market economy would enable them to strengthen the community economy.

Community members have a long traditional of working solidarity in the search of alternative development. In the 1980s, a group of villagers together with an NGO founded a traditional herbal medicine centre in order to reduce villagers’ medical and pharmaceutical expenses. As a result, in four years, the community expenditure on drugs declined by 75 per cent. In the 1990s, the villages started to produce organic rice and established and managed their own rice mill in a form of co-operative business. The success of this small business has since allowed the community to build a second and larger mill. The group was the first of its kind to receive recognition from the international organic certification body, IFOAM (International Federation of Organic Agriculture Movements). Recently, a women’s group in the community began to organise the production of "snack foods" made from local raw materials. Another group has been successfully established to produce shampoo, dishwashing liquid and laundry detergent.

Despite this successes in operating the Herbal Centre, Rice Mill and other micro-businesses which have helped increase local income and decrease some expenses, many farmers are still buried in debts. According to the villagers, the community currency as a tool of self-reliance not only increases money supply, it also encourages more diverse production at a local level to reduce the outflow of money, resources and people to Bangkok and beyond. Thus, the villagers are trying to solve the debt problem at it root. Unfortunately, the Government of Thailand intervened and prohibited the use of "Bia" after less than a month of circulation, on the basis that the use of such system would "threaten national financial stability". Nonetheless, even in that short time the system showed that the use of a local currency encouraged villagers to purchase more local products.

To sum up, the current mainstream form of integration into the world financial system has resulted in the exclusion of many developing countries from fair and sustainable participation in the world economy, and excludes poor people from fair and sustainable participation in their local and national economies. Thus far, the full-scale outward oriented development path has alienated small players. The decision-making power has been pulled out from communities and small nations and assumed by the global institutions, controlled by the G7 governments and TNCs. Hence, significant shifts in the current balance of power away from the global level towards the regional and national levels are required. It is vital that national economies be redirected to accommodate domestic development. Both monetary and fiscal policy should respond to the needs of small and medium size businesses, local initiatives and ordinary households in the real economy, rather than foreign investors. One step back from the current unsustainable globalisation process would do no harm. On the contrary, it would provide space for reorganising and strengthening local economies as shown by "Kud Chum" and several other communities in the world.