On October 12, following news that the King of Thailand, Bhumibol Adulyadej, was in an unstable condition after receiving hemodialysis treatment, the macroeconomic consultancy Capital Economics released a briefing note warning of imminent calamity for Southeast Asia’s second largest economy.

Thailand's Quest For Stability

Thailand

“The failing health of the king adds another layer of uncertainty to an already highly unpredictable situation,” economists Krystal Tan and Gareth Leather wrote. They went on: The situation “poses a key risk to the country’s economy. His death would plunge the country back into political crisis, which in turn could push the economy into recession.”

Right on cue, the next day, King Bhumibol, the world’s longest-serving monarch, passed away. But the economic catastrophe didn’t arrive, at least not immediately. If anything, the markets reacted positively. The following day, the Stock Exchange of Thailand (SET) Index traded up over 4% while the Thai baht gained over 1% against the dollar. Some analysts even saw a silver lining for financial markets. Deutsche Bank, for example, said: “The passing of the king of Thailand yesterday should help put an end to the sharp volatilities in the stock market that began in September.”

The government, also known as the junta because it came to power in a military coup in May 2014, was quick to put out the ‘business as usual’ sign. Prime Minister Prayuth Chan-ocha, while announcing a year of official mourning, projected an image of normality, reassuring the world that everything would proceed as planned, including the royal succession and next year’s general elections. And he had a message for investors and businesses: “On the economic side, whether it’s the stock market, trade, investment or business sector, please don’t stop.”

Revolving Governments

But business has been here before. Since 2006, when the country’s most recent political crisis began, there have been two military coups, two new constitutions, four elections, seven prime ministers, a spate of violent demonstrations, civil unrest leading to the imposition of martial law and administrative chaos. That chronic political instability has filtered into government and businesses, resulting in policy inertia and weak economic growth. It’s no wonder business is cautious.

Peter Cappelli, a Wharton management professor, says there’s good reason why business is in a watch-and-wait mode. “Political uncertainty is hugely damaging to business as it adds to the risk associated with financial investments. That’s especially the case when businesses have options: One may like Thailand’s messy democracy to Vietnam’s authoritarian government, but the stability of the latter has caused international businesses to move operations there,” Cappelli says. “Indonesia offers an interesting parallel as a country rich in natural resources and cheap labor held back for decades by uncertainty and corruption that now, with more stable, effective government, is booming. Historically, Singapore’s sustained economic miracle came after it left Malaysia and created an extremely honest and efficient, albeit not democratic, government.”

“One may like Thailand’s messy democracy to Vietnam’s authoritarian government, but the stability of the latter has caused international businesses to move operations there.” –Peter Cappelli

In an interview with [email protected] last year, Sethaput Suthiwart-Narueput, managing partner of Advisor Co., a corporate advisory firm in Bangkok, said the instability was widespread, affecting every sector of society, including government. “The cabinet also changes a lot, even though you have the same government in place. So it’s political instability and administrative instability as well. I can’t remember any longer the number of education ministers we have had over the past years. The average tenure is less than a year.”

Suthiwart-Narueput, who also heads the think-tank Thailand Future Foundation, says his country has lost its economic mojo, and with an aging population, declining labor force, low productivity and stiff competition from ASEAN countries, Thailand is a country in economic decline.

Once the fastest-developing economy of mainland Southeast Asia, Thailand now finds itself near the bottom of the table. In the 1980s when it was rising from an agricultural economy to a regional industrial powerhouse, its average GDP growth was 7%. According to the Asian Development Bank, economic growth in the first half of this year was 3.4% year-on-year. In 2014, GDP plunged to 0.7%.

More generally, the last decade has been particularly bad. Thailand’s manufacturing and electronics industries have been hardest hit, losing business to a rising Vietnam. The only bright spot has been tourism, which now makes up about 10% of the economy.

Richard Martin, managing director of IMA Asia, a management consulting firm that advises senior executives in charge of Asia Pacific operations, has also been monitoring the decline. “For the decade to 2005 Thailand averaged 3.2% annual GDP growth. That was a tough decade, which included the 1997 Asian economic crisis and the 2001 tech wreck,” he notes. “For the decade to 2015, Thailand’s average growth rate remained 3.3% – essentially unchanged. It should have been at least two percentage points higher if it had kept pace with ASEAN peers like Indonesia, Malaysia, Vietnam, and the Philippines.”

Political Instability, State Control

Thailand’s lackluster performance, Martin contends, “is largely due to political instability and poor policy choices. The political instability led to fixed investment levels failing to lift above 25% of GDP. This wasn’t so much foreign firms failing to invest, as plenty of foreign investors established factories for making cars, chemicals, and electrical and electronic goods; it was more a matter of restrained investment by Thai businesses.”

He continues: “The poor policy came about in two ways. In part it was gridlock as parliament blocked the policies” of former Prime Minister Thaksin Shinawatra and his sister, Yingluck Shinawatra, who also became the Prime Minister. “Then, there were bad policies, notably the first-time car buyers program — a great adrenalin shot followed by a two-year hangover for the consumer market. Also, of course, the rice price support scheme. While purportedly great for farmers in its first year, it seemed mainly to funnel money to the upcountry rice trade mafia, which was always and ultimately the foundation of Shinawatra family power.”

Political instability, in short, can dampen business activity, paralyze government policy and lead to bad policymaking. What, then, is the source of this instability?

Philip Nichols, a Wharton professor of legal studies and business ethics, says that while there are many causes, the main one is the dominant role of the state. “I think that one very significant cause is that most of the economy is in the direct or indirect control of the state. This means that there is a lot at stake in winning or losing elections, and parties are willing to go do almost anything to obtain control.”

“There are many people in Thailand with a lot to lose, and a great number of people in Thailand who are cut out of the real economic activity.” –Philip Nichols

He adds, “Unfortunately, this is linked to endemic corruption, which again amplifies the stakes. So, there are many people in Thailand with a lot to lose, and a great number of people in Thailand who are cut out of the real economic activity.”

Regina Abrami, a political science lecturer at the University of Pennsylvania and a senior fellow of management at Wharton, suggests there are also underlying socio-economic issues, like widening income inequality that can lead to social grievances and divisions. “Thailand’s social structure is rich

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