The military staged a coup d’état in Thailand recently, after six months of political deadlock and turmoil. Southeast Asia’s second largest economy has witnessed bouts of political instability with frequent changes of government and military coups over the last eighty years. The Siamese revolution of 1932 ended Thailand’s seven century long absolute monarchy through a military coup. Since then, Thailand has been a constitutional monarchy, with the King as head of state, legally bound by a constitution. This most recent coup is Thailand’s twelfth since 1932.
The Thai economy has withstood political instability, external shocks and natural disasters relatively well. The turbulent past decade was marked by a tsunami, military coup (2006), global financial crisis, political unrest (2010), floods and the disruption of its auto supply chain, due to the 2011 Tohoku earthquake in Japan. Despite all this, GDP grew at an average rate of 4.2 percent in the last ten years, and the influx of foreign investment continued. This ability to rebound quickly after a domestic or external shock has earned it the moniker “Teflon” Thailand, and given long-term investors’ confidence. Thanks to its sound macroeconomic management, stable banking system, and strong fundamentals, Thailand has been able to weather previous political upheavals. Public debt levels are comfortable (about 45 percent of GDP), inflation is tame, the baht is stable, and unemployment levels are low. Thailand is perceived to be a vibrant economy with a relatively good business environment. As per the World Bank, the country ranks 18th out of 189 countries in its ease of doing business index. The index further highlights that Thailand is better placed than its Asian peers across a range of index criteria, such as dealing with construction permits, access to electricity, registering property, investor protection, and enforcement of contracts. An efficient supply chain and solid infrastructure make Thailand an attractive destination for long-term investors who are not concerned about short-term volatility. For Japanese automakers, the narrative of Thailand’s long-term growth has remained intact despite bouts of instability.
However, the present political crisis is badly timed. Global economic growth is slow, domestic demand is suffering, household debt is high (82 percent of GDP), the baht has slipped, and a much anticipated 2 trillion baht infrastructure spending bill has been rejected. An inability to form a stable government by mid-year may impact foreign direct investment and business confidence in the country.
It is therefore pertinent to ask, what could have been different if Thailand had its political house been in order? Even if the economy manages to recover as quickly as before, Thailand’s ability to bounce back after every crisis cannot be taken for granted. It would not be wrong to assert that Thailand has been stuck in a “middle income trap” since the Asian financial crisis, and given its current economic potential, may have progressed better had political stability prevailed. The middle income trap refers to a situation in which a country, after years of rapid growth (driven by low wages, natural resources, low value added manufacturing and exports), stagnates at the middle income level. Thailand’s real gross national income (GNI) grew at an average annual rate of 7 percent during 1985-97, before falling to an average of 3.8 percent in the post-Asian financial crisis period. Thailand’s export-led development strategy enabled its impressive transition from a low income to an upper-middle income country in the past twenty years. However, inequality continued to grow. According to a World Bank study, the GINI index of consumption inequality in Thailand was 39 percent in 2010, high by international standards. Its 52 percent income inequality remains the highest in East Asia. Thailand just manages to fare better than some unstable African and Latin American states in this regard.
Thailand’s political landscape is complex, marred by the deep divide between the red shirts and yellow shirts. The red shirts, who align themselves with former ousted Prime Minister Thaksin Shinawatra, have been pushing for a full-fledged democracy in Thailand, while the “yellow shirts” belong to the royalist camp. The rise of Thaksin in the last decade signifies the growing demand for greater equality. Thaksin’s ambitious range of pro-poor policies helped him successfully tap into the sentiment of the rural and working classes.
However, this political discord finds it roots in the division between the rural masses in the north and northeast of Thailand and the elites in Bangkok. Apart from the class conflict, some of this divide is artificial. It is well known that public expenditure in general, and especially for education, has long been skewed toward Bangkok. The greater concentration of economic activity and wealth in Bangkok has worsened the existing social divide. This continues to be the weakest link in Thailand’s economic growth story. Lack of political will has derailed structural reforms and weakened the country’s institutional framework. Long-term policy reforms such as investment in human capital, fiscal reforms, land distribution policies, and social security reforms are needed to address the issue of income inequality. Thailand has thus been trapped in a vicious cycle of unbalanced growth, rising inequality and political unrest. This is the biggest impediment to inclusive growth.
There is ample evidence to suggest that growing inequality can contribute to political unrest. It is this fact that needs the serious attention of policymakers in Thailand, irrespective of the form of government in Bangkok.
Even if Thailand resolves its current crisis and is able to form a stable government by mid-year, there is little cause for optimism. The country cannot take the next step towards economic development unless it addresses its firmly entrenched social divide.
Prachi Priya is an economist at a top corporate house. The views here are her own.