Thailand's Politics-Proof Economy

Although national elections scheduled for July 3 have lots of observers worried that another coup or bloodshed could be in the offing, Thailand's business community appears not to have noticed, or at least not to have panicked. The Stock Exchange of Thailand has surged by 40 percent over the last year, according to Bloomberg, as investors vote with their pocketbooks.

Although 15,000 rebellious Red Shirt members of the United Front for Democracy Against Dictatorship met May 19 to observe the first anniversary of the bloody events that took place in Bangkok, the economy continues to power ahead as it did throughout the violence, dipping only slightly. According to government figures, the economy expanded by 9.3 percent year-on-year during the first three quarters of 2010. That was the second-strongest economic performance in Southeast Asia after Singapore. It is as if Thai businessmen – and foreign ones too – have been putting up with the carnival of Thai politics and the country's 18 coups or attempted coups over the past 70-odd years and are resigned to doing it again.

The Red Shirts continue to demand a reversal of the 2006 coup that drove former Prime Minister Thaksin Shinawatra from power and also demand that current Prime Minister Abhisit Vejjajiva be put on trial for his role in the May 2010 crackdown in which 91 people died, most of them protesters. Abhisit's Democrat Party and coalition partners are in a tight race against the opposition Pheu Thai Party, headed by Thaksin's youngest sister, Yingluck Shinawatra, who previously ran the Thaksin family telecommunications and real estate operations. Observers believe the Democrats and their allies may pull off a close victory although it is questionable whether the election will do much to soothe tensions either way.

But despite the chaos, the World Bank reported in April that domestic demand has continued to accelerate, built on higher farm incomes from the commodity boom and from low domestic interest rates. Consumption and investment in domestically produced goods and services expanded “well above the rates registered between 2006 and 2009, mainly due to growth in household consumption.”

According to Thailand's Board of Investment, foreign direct investment applications were up a sizzling 58 percent year-on-year in the first quarter of 2011. A total of 453 projects have applied for Board of Investment incentives, up 13 percent over a year earlier. Some 60 percent of the investment is coming from the normally risk-averse Japanese, with the investment flowing into petrochemicals, paper and plastics.

Even tourism, which could logically have been expected to drop markedly in the face of weeks of tear gas and violence, was hardly dented by last year's events, or by heavy floods during October and November. From January to November 2010 the industry, which contributes about 6 percent annually to gross domestic product, grew by 12.7 percent over 2009, admittedly a tough year in the face of global financial problems.

Higher demand for autos and agricultural products supported renewed growth in external demand, the World Bank said in its April report. Now, even with more political trouble predicted, economic growth in the first quarter of 2011 appears to have hit the fastest pace in a year, with GDP growing 2.2 percent in the first three months – nearly 10 percent annual growth if it continues.

So what's going on?

There are several reasons for Thailand's performance — one is that most of the country's foreign direct investment is outside of Bangkok, the site of most of the protest. Both Ford and General Motors increased investment in auto manufacturing. Japanese overall investment rose by 35 percent in 2010. It may well increase more as hard-hit companies devastated by the Japanese earthquake and tsunami – and by subsequent energy shortages – seek to locate elsewhere.

Second, tourism is spread across the country and not concentrated in Bangkok, although the attractions of its architecture, cuisine and nightlife are well known. The country's famed beaches in Phuket, Koh Samui and elsewhere absorb a lot of visitors for whom Bangkok is often no more than a transit point. Election or no, the country expects 15.5 million foreign visitors this year, delivering revenues of Bt600 billion (US$18.45 billion).

A lot of the economic growth is being driven by international factors. Higher agricultural prices, a curse to many countries, have been somewhat of a boom to Thailand, the world's largest rice exporter. The prices have boosted agricultural wages as well, which should theoretically be a relief for a government facing election. Lower interest rates are aiding construction and investment. With Thailand having become a regional auto and auto parts production center, a surge in external demand throughout Asia is boosting Thai exports. The government has been using domestic price controls to cushion the impact of rising food and fuel prices. And with energy prices now easing, it is a boost for both the economy and the government's election plans.

The fact is that beyond that, the Abhisit government has been doing a relatively good job with the economy. The technocrats at the Bank of Thailand, the country's central bank, and the Ministry of Finance, have done a good job of navigating the economy through very difficult times. Economists give the government high marks for its macro policies.

At the same time, the government is doing all it can with its own populist program, increasing the rice subsidy, providing free electricity to poor households, subsidizing diesel to the tune of US$10 million a day.

A 5 percent hike in civil service salaries came into effect in April. The government has promised to lift the minimum wage by 25 percent through 2012, is delivering education loans to 250,000 university students and making low-interest loans to taxi drivers. It has capped the prices of palm oil and sugar, among other commodities, all of which are populist measures seeking to blunt the anger of the Red Shirt forces. But whether that is true or not, it has kept the economy boiling along at a healthy pace, and that is enough for investors both domestic and foreign.

It is always possible that violence erupting from the grim political situation could reverse the economy. But there appear to be fail-safes built into the equation that insulate the business world at least partly from politics. One hopes they continue to work.