Drip, Drip, Drip: The Impact of Thailand’s Political Chaos on the Thai Economy (and the World)

For months now, even as Thailand’s political crisis has escalated from street protests into daily violence, the disintegration of state institutions, and the threat of a coup, most Thai businesspeople, foreign investors, and analysts of the Thai economy have maintained a relatively positive outlook for the Thai economy this year and next. After all, as several long-time investors in Thailand have told me, the country’s economy has over decades proven extraordinarily resilient, surviving nineteen coups and attempted coups, natural disasters, the Indochina wars, and many Bangkok street protests that ended in bloodshed. Most recently, after the military fired on protestors in Bangkok in 2010, killing at least ninety people, and demonstrators burnt several areas of the central business district, the Thai economy rebounded quickly. It rebounded again after massive flooding the following year, with even many electronics manufacturers—particularly makers of disk drives and other computer parts—immediately returning to the country after their plants were submerged and many of their models lost.

Given this history, many observers argue, the current turmoil will not appreciably slow Thailand’s economy, the second-largest in Southeast Asia. The Thailand Development Research Institute, probably the foremost economic analysis and forecasting outfit in Thailand, predicts that the turmoil will weaken growth in the first quarter of 2014, but that growth likely will then pick up again later in the year.

Why has Thailand demonstrated such resiliency in the past? The country has a long history of liberal policies toward foreign investment, and of macroeconomic stability. Investors have enormous sunk costs in Thailand, particularly Japanese and Western investors with auto plants and other manufacturing operations in Bangkok and the eastern seaboard. Winding down these operations would require taking enormous losses and abandoning decades of training skilled workers like auto parts technicians. Such sunk costs make it likelier that these investors will stick out any turmoil. Finally, many investors and tourists simply like Thailand, because of the country’s naturally pleasant weather and culture and food, and its location smack in the center of the region.

But that resiliency is not going to last forever. Granted, there is going to be no mass exodus of investors from Thailand now, or probably at any time, no run for the door of the kind one might imagine when a country’s politics turn violent. The country’s historic strengths, and the positive image of Thailand among investors prevent Thailand’s economy from melting down completely, as appears to be happening in Ukraine right now. The years of political turmoil, which now dates back to the mid-2000s, are instead having a corrosive effect on Thailand’s economy, more like the drip, drip, drip of a slightly leaky faucet that ultimately busts your water bill than the gusher of a pipe that breaks open and pours water everywhere. The corrosion can be seen not just in the underperformance of the economy in the beginning of 2014, but in the economy’s long-term underperformance compared to its potential. The corrosion can be seen not by investors pulling up stakes and leaving in a horde but rather in the decisions of new investors to look elsewhere, when in the past they would have made Thailand their first choice for new investments in all types of low-end to high-end manufacturing.

How has the political turmoil corroded growth? For one, the largest Thai companies have in many ways become involved in the political turmoil, taking sides or struggling to maintain their share of the Thai market; Thailand’s biggest domestic firms have, partly as a result, been slow to take advantage of the economic and political opening next door in Myanmar, where Thai firms should have been poised to dominate an economy poised for enormous growth. In addition, Thai politicians’ focus on staying in power, and on destroying their opponents, has distracted from their focus on critical priorities for Thailand’s long-term competitiveness, including upgrading the quality of the workforce, making it easier for Thai entrepreneurs to develop and patent products, improving the quality of Thailand’s wireless and physical infrastructure, and other priorities. The zero-sum nature of current Thai politics also has led both Puea Thai and, when they were in power, the Democrat Party to continually offer populist promises in an attempt to either shore up their power base in the north/northeast or to win over that group of the population. Although some of these populist promises went unfulfilled, and others had a powerful impact on equality, still others, like the disastrous rice pledging scheme, hindered growth and set a terrible example for future economic policy-making.

Finally, the constant political turmoil has, over fifteen years, driven some of the most capable Thai civil servants out of government and into the private sector, either in Bangkok or abroad. After all, who wants to continue to work in government when you never know whether elected ministers will try to purge the bureaucracy of anyone who does not kowtow to the prime minister (Thai Rak Thai/Puea Thai’s strategy) or whether angry, sometimes armed protestors will besiege your ministry, lock the doors, and physically try to bar you from entering and even assault you (PDRC/Democrat strategy)? The bureaucracy, in the past, was critical to maintaining Thailand’s long-term macroeconomic stability and its openness to investors, but the Thai bureaucracy is not what it was in the past. With governments coming and going, the civil service no longer can provide the kind of policy-making anchor that it once did.