Thailand’s Generals Can’t Restart the Economy

Most of Thailand’s economic news is continuing to dampen any remaining hope that the military junta, now in power for 15 months, would usher in an era of economic revival.

The kingdom is at best static while long-laggard neighbors Vietnam, Myanmar and the Philippines appear to be on the rise. Indeed the perception at home and abroad is of a society which has stalled despite its combination of entrepreneurial spirit and ethnic cohesion. This is not just reflected in the divide between red and yellow shirts, between richer and poorer, between rural and urban regions.

Sensing stagnation, coup leader and Prime Minister Prayuth Chan-ocha is expected to make major cabinet changes in September. However, given the regime’s dependence on a mix of Democrat Party ministerial retreads such as Finance Minister Korn Chatikavanij, senior bureaucrats and conservative academics for most posts, it is hard to see changes of face making much difference to policies or implementation.

Beset by a just concluded drought, gross domestic product growth for the year looks unlikely to exceed 3 percent even though 2015 is supposed to be a year of recovery from last year’s politics-marred 0.7 percent. Some excuses can of course be found in the international environment. Prices of most commodities, including rice and rubber, are weak.

One of Thailand’s major tourist markets, Russia, is has seen the steep decline of its currency. And western Europeans have also found the euro buying fewer baht than before. China’s slowdown is obvious to all concerned and Thailand, though still far ahead of its competitors, faces increased competition from other regional destinations.

Yet it is increasingly clear that Thailand’s problems are more than just cyclical or caused by political turmoil. They reflect an inability to progress beyond the formula of agriculture/tourism/manufacturing hub that served the nation very well into the 1997 crisis and through the subsequent recovery.

More specialist agribusiness remains very competitive but Thailand’s bulk production of rice, rubber and tapioca is increasingly uncompetitive even at the meager (at least compared to metropolitan) incomes of the farmers. Deposed Prime Minister Yingluck Shinawatra’s ill-starred rice subsidy scheme and subsequent less costly interventions by the Prayuth regime simply paper over the poor productivity of much of Thailand’s agriculture.

Thaksin never tackled this issue but he did try to reduce inequalities through government spending which in effect redistributed a little wealth from metropolitan Thailand to the rest.

In theory, there would now be twin efforts to improve productivity while accepting that much farming cannot be justified economically. It is not as if Thailand cannot absorb labor released from farming in other areas. The nation is already host to perhaps three million workers from Myanmar and Cambodia whose low-paid labor as domestic helpers and workers in fisheries and construction actually provides a subsidy for others – mostly the urban middle classes and corporate profits.

Perhaps the only solution is gradual rural depopulation as the old generation dies off. As it is, Thailand’s birth rate has been below replacement for almost 30 years so if there is to be economic growth at all it must come from productivity or increasing immigration.

The tourism industry has enjoyed successive booms from Europe, the Middle East, Russia and China, but now only the latter still has momentum, though Indian tourism is growing as well. But more tourist numbers do not translate into higher productivity. Indeed, there is some evidence that the high-yield sector is lagging the mass-market one – the opposite of what should happen if productivity is to rise.

Thailand is doing well in other, higher-income service industries such as medical and as an ASEAN hub for regional activities in finance, advertising and transport. A few of its major companies are regional if not global players. Nonetheless political instability and the poor image of the junta have held it back. And its focus remains mainly on Bangkok which adds to economic imbalance.

The other leg of past growth was manufacturing, particularly the auto and electronics industries of the eastern seaboard and around Bangkok. The former continues to attract some new investment, particularly by Japanese, for export, particularly to ASEAN. But Thailand’s relative position is being eroded by the attraction of potentially bigger markets such as Indonesia and the increase in vehicle affordability in Vietnam.

Electronics, always reliant on foreign investment and markets, has stalled. Altogether manufacturing in 2015 may struggle to expand by more than 2 percent.

The only part of the economy appearing to boom at present is residential construction in Bangkok, which is being financed with bond issues at a time when money is cheap.

Whether or not there is rising financial risk from this, it reveals the further distortion of the economy towards the metropolis and towards investment in assets which are unproductive or can only be afforded by the more affluent city dwellers.

The economic imbalance is of course one of the reasons for the political divide which led to the coup. Although the junta pledged to address some of the inequalities, its highly conservative, monarchist ministers have offered few measures to address the issues. The result is that on the surface Thailand looks stable enough with a current account roughly in balance, a budget deficit which is modest and a currency which has declined 6 percent against the dollar since the beginning of this year but has been strong compared with Malaysia, Indonesia and many others.

Indeed the question of the baht presents a quandary. On the face of things, given a current account surplus running at 4 percent of GDP there appears no fundamental reason to be other than relatively strong – also a matter of pride. Yet much of the surplus is due to the collapse of oil prices while competitors in some sectors have seen their currencies fall fast for that very reason. Manufacturing exports have been especially soft.

Weak domestic demand is the other reason for the current surplus. Investment has picked up a little but not necessarily where it is most needed. Plans for major infrastructure projects, notably rail lines to be financed by Japan and China, are moving ahead but inevitably slowly as a result of government caution as well as implementation capacity. Eventually they should help reduce metropolitan domination, but that will take many years. Household debt is high and constrains consumption – though still rising faster than GDP – and positive real interest rates (particularly for the poorer classes who borrow from money lenders not banks) are a further drag.

The junta may be able to shrug off as rote responses US and other western protests against the coup, and Prayuth’s failure to re-establish democracy or produce a new constitution. But the exploitation of migrant labor by the fishing and canning industries, Thai involvement in human trafficking and scandals involving the maladministration of justice, reach a wider international audience.

Arrests of whistle-blowers who have revealed slave labor abuses make a nonsense of regime claims to be cleaning up the system. Either it is powerless at the provincial level, or itself corrupt. The return of Uighur refuges to China was a sign not of nationalism but of kowtowing to China. They are a deterrent to some businesses and tourists. Once in the van of economic and political development in the region, Thailand looks unexciting, or in actual decline.

That decline is reflected, indeed may stem from, the poor state of education. Thailand was once in the forefront of literacy in Asia. The elite get the best overseas educations they can but otherwise inadequacies of secondary and tertiary education not only sustain the social divide but hold back improvements in productivity.

Some in Prayuth’s government are well aware of this. But doing anything about it is not only a long-term project but is almost certainly beyond a military leadership suspicious of higher education and supported by an elite which in practice seems to prefer to keep a big gap between the top echelon (mostly with foreign degrees) and the rest.

Shorter term, the death of King Bhumibol Adulyadej still lies ahead. The increasingly frequent public appearances of Crown Prince Vajiralongkorn suggest both that there is no doubt about the succession, but also that it may be close. The Prince may have had to sacrifice his previous wife and her family, tainted with connections to Thaksin Shinawatra, to ensure military support for him.

But whatever their cause, those events underlined the fact that the monarchy’s prestige rests on the single, silent figure of the current king. For sure Thailand has many strengths and virtues which other nations lack. But for now at least it is at a dead-end politically, socially and economically.

The more likely way out now is not a red shirt surge but realization by the elite that Prayuth has no answers and some genuine return to democracy and accommodation with the Shinawatras is the only way out of the dead-end. But Thailand will probably remain in a deep freeze until the monarchical transition.