July 31, 2014 12:00 am JST

Economic reforms 'make-or-break' for Thai junta

RON CORBEN, Contributing writer

Gen. Thanasak Patimaprakorn, left, supreme commander of the Royal Thai Armed Forces, talks to Thai Army chief Gen. Prayuth Chan-ocha to discuss the 2015 national budget in Bangkok on June 13. © Reuters

BANGKOK -- A recent uptick in Thai economic indicators suggests that the country's economy is on the road to recovery after the May 22 coup. But analysts warn that without serious reforms, including promised measures to help narrow the gap between the "haves" and "have-nots," Thailand could again slide back into political instability.

     In the short term, forecasters say, the economy will bounce back quickly after a disastrous first quarter. Gross domestic product contracted in January-March by 2.1% compared with the previous quarter. The National Economic and Social Development Board, a state-run think tank, is projecting growth of 1.5-2.5% this year, despite the earlier contraction.

     The Bank of Thailand had earlier revised down its 2014 growth projection to 1.5%, from an initial forecast of 4.8% made last year. But central bank Gov. Prasarn Trairatvorakul recently predicted 5.5% growth in 2015 and strong growth in the second half of this year. "Growth is estimated at 3.4% in the third and fourth quarters," he said July 9. "Therefore, there is not a concern if growth ends up at 1.5% for the whole year."

     Even as local and foreign investors welcome signs of renewed business confidence and political stability, the military government is coming under wide-ranging pressure to address social and economic issues neglected during a decade of political conflict.

     One key issue is poverty. According to the World Bank, 5.4 million of Thailand's 67 million people live in extreme poverty, which it defines as an income of $1.25 a day per person, or less. The bank also points out that such poverty is largely a rural phenomenon, with 88% of the poor living in the countryside, especially in the North and Northeast.

     "The benefits of economic success have not been shared equally, especially between Bangkok, Thailand's largest urban area, and the rest of the country," the bank said.

     This analysis is in line with the conclusions of a study by Pasuk Phongpaichit, a political economist at Chulalongkorn University, and Pornthep Benyaapikul, an economics lecturer at Thammasat University, in a paper sponsored by the independent nonprofit Asia Foundation.

     The two academics found that inequality in Thailand "has remained persistently high by regional or even global standards throughout decades of economic growth." However, they also said that a process of "democratization and changes over years of economic growth have challenged the status of the ruling elite, and associated institutions, including the civil service, the monarchy and the military."

     Thaksin Shinawatra, the former prime minister who came to power in 2001, was ousted in 2006, and fled the country in 2008, recognized the voting power of the poor. He harnessed their loyalty through policies that eased the financial burdens of many of the poor.

     His predominantly rural base has remained sound despite his flight, allowing allies to establish a grass-roots "red shirt" support movement and win the general election of 2011 that propelled Thaksin's younger sister, Yingluck, to power. She was removed by the courts in the lead-up to the May 22 coup.

Middle-income trap

Thai business leaders, who readily agreed to confer with the military junta, known as the National Committee for Peace and Order, are keenly aware of the need for action on social and economic issues if further political instability is to be avoided. They have called for policies designed to bridge income disparities, clamp down on corruption, speed up private and public investment, and provide support for small- and medium-size enterprises.

     Other commentators say Thailand's underlying problem is that the country is becoming stuck in the so-called middle-income trap, in which developing countries fail to maintain real economic growth after a certain point. Such countries often have low-wage levels, unskilled labor, poor productivity, low value-added manufacturing, and rely on unsophisticated exports as long-term drivers of growth.

     Thailand remains a favored Southeast Asia destination for foreign direct investment, which rose by 20% in 2013 to $13 billion -- third highest after Singapore's $64 billion and Indonesia's $19 billion. However, analysts say the country faces challenges in promoting innovation, investment in technology, and improving education.

     Veronique Salze-Lozac'h, the Asia Foundation's chief economist, said Thailand's priorities should be in education and training, and developing a partnership between the public and private sectors to overcome constraints that are depressing long-term productivity growth.

     "The government can't change everything at once," she told the Nikkei Asian Review, "but by engaging in this public-private dialogue and partnership they could actually identify some key constraints that are really preventing enterprises from developing. This could encourage", she added, "new investors to come and invest in Thailand with education, a good labor force and a better business environment."

     The Asia Foundation argues that Thailand's economic development is also being damaged by an imbalance in budget allocation between Bangkok and much of the rest of the country. This has been perpetuated by successive governments -- both those led by the Thaksin siblings and those of the urban-based Democrat Party. The World Bank estimated in 2012 that Bangkok accounted for about 26% of Thailand's GDP, but received more than 70% of government spending.

     "Right now the problem is there is such a discrepancy and such a difference between Bangkok and the rest of the country," said Salze-Lozac'h, calling for a more equitable distribution of resources around the country. "Part of the decentralization could actually help improve key elements like education (and) access to health, and that in turn will also help the population to be able to seize opportunities," she said.

     Adrian Dunn, CEO of Brooker Dunn Asset Advisory, a Bangkok-based investment fund and management group, said that a redistribution of power could also play a role in ending Thailand's cycle of political conflict by reducing the dependence of the rural poor on funding from the capital.

     "Most populist programs in the past 12 years have been front-loaded -- they had a debt-driven hangover," he said, noting that such programs had encouraged people to increase consumption, but only by increasing their debts. For example, a $20 billion rice price support scheme introduced by the Yingluck government led to a sharp increase in rice farmers' gross incomes.

     But the scheme, now halted by the military following corruption allegations, also led to higher debts for farmers. When the generous subsidies dried up after the government ran into funding problems, at least 28 farmers committed suicide because of their debts last year.

     Viktor Shvets, head of Asia strategy at Macquarie Securities in Hong Kong, said Thailand needed to recognize that the economy's reliance on low wages, export growth and mass manufacturing was no longer a guarantee of prosperity, and that such traditional drivers of growth in Thailand faced greater competition from elsewhere in the region.

     "If you are no longer able to grow, you don't have enough resources, financial or otherwise to divide among the country," Shvets told a conference on the middle-income trap. "That's where income and wealth inequality increases and that's where your social dislocation starts.

     "The key is if you don't have any other engines of growth it becomes more of a zero-sum game. If it's a zero-sum game, restructuring and reform become a lot more important," he added.

     General Prayuth Chan-ocha, the army commander who led the coup, has set a timetable of 15 months to introduce political and economic reforms before fresh elections, and has said the regime will move swiftly to promote infrastructure spending, crack down on corruption, and transfer $3 billion to rice farmers left adrift by the rice price-support scheme.

     There has also been much discussion of the need to push more resources out to the provinces. Pavida Pananond, an associate professor at Thammasat University's business school, said the need for substantive reform, including decentralization, was clear to everyone. Regional grievances would otherwise resurface at the next election, she argued. "Thaksin could win again and if that happens we'll have (another) uprising on the streets," she said.

     But Apichat Satitniramai, economics professor at Thammasat University, warned that any attempt to shift power from Bangkok could itself be destabilizing, because it would be resisted by vested interests in the capital.

     "This is 140 years already of centralization since Rama V, otherwise known as King Chulalongkorn (reign: 1868-1910)," he said. "This is one of the key defining features of the Thai state, and they are not going to let it go easily."