Analysis and policy recommendations on Thailand's binding constraint

Addressing Thailand's middle-income problem

By Tom Kaydor/ thkaydor@gmail.com

I. Introduction to the case

On 1 July 2011, Thailand became a middle-income economy (World Bank 2014).  This economic progress translated into poverty reduction, improved wellbeing, and increased access to public goods and services. For example, ‘over 40 per cent of the Thai population escaped poverty in the past 25 years’ (Jitsuchon 2012, p.13). However, Thailand’s national income statistics (1952-2011) show declining annual growth rates from about ten per cent in early 1990s and afterward due to the Asian and global financial crises, the 2011 floods and political instability (World Bank 2014). Since 1997, Thailand’s growth rate has stagnated around four per cent (Jitsuchon 2012), and its current GDP per capita is US$4420 (UNDP 2014). Due to this stagnant growth, Thailand is said to be caught in a ‘middle income trap’ (Benyaapikul & Phongpaichit 2013, p.1). A middle-income trap results ‘when a country graduates from a low-income economy to a middle-income economy, but stagnates without much prospect of advancing to a developed country status’ (Gill et al. 2007 cited in Jitsuchon 2012, p.15, Kharas and Kholi, p.281). 

Although there are more complex issues to address to promote growth in Thailand, this essay argues that political instability remains the country’s binding constraint. This constraint results from recurrent military interventions in Thai politics, centralized state power, and the failure of key political actors to reach mutually beneficial political compromises (Chambers 2010). The essay therefore proposes that the government of Thailand decentralize power to elected regional governments that will manage local development programmes while the central government concentrates mainly on macro level issues like monetary policy and national security.

II. Key problem or issue in the case

In 1932, Thailand became a constitutional monarchy, replacing the absolute monarchy that was considered a barrier to Thai development (Dixon 1999). Since then, the country adopted 17 different constitutions, and witnessed over 18 actual and attempted military coups (Tweechie 2011). Thailand is politically unstable because of the recurrent meddling of the military into politics (Chambers 2010). As Laothamatas (1988) contends, bureaucrats and military officers centrally manage the affairs of the state. The country, according to Chambers (2010), is a ‘tutelary democracy, ‘a form of defective and unstable democracy under which non-elected elites (the monarch, privy council and military) hold veto powers over elected officials’ (p.837).

In early 2014, failure of the two major rival parties in Thailand to reach political compromise led to another military intervention. Thousands of protesters led by Suthep Thaugsuban, former deputy prime minister and powerbroker in the Democratic Party (‘Yellow Shirts’) mainly Southerners locked down Bangkok, forcing Prime Minister Yingluck Shinawatra of the Pheu Thai Party (‘Red Shirts’ predominantly from the North and Northeast) to step down, despite a confidence vote from parliament (Nehru 2014). Due to the political stalemate and eventual break down of law and order resulting from the demonstration amongst rival parties, the Thai military declared martial law on 20 May 2014, ordered the cabinet to report to it, and banned gatherings of more than five people (BBC News 22/05/2014). Thailand is presently under a military dictatorship.

III. Theoretically informed discussion of the problem

Political instability is Thailand’s major challenge. First, it undermines economic growth and development, and weakens the share of investment in GDP (Alesina and Perotti 1996). Empirical studies have tested and agreed with said relationship. For example, studies by Barro et al. (1997) and Barro (1996) show a direct negative impact of political instability on economic growth. Also, political instability is a fundamental variable to explain the systematic underperformance of African countries between 1970 and1990 (Guillaumont et al. 1999, Azam et al. 1996 cited in Kefi & Zouhaier 2011, p.798). For their part, De Haan and Siermann (1996) do not contest the effect of instability on growth, but state that instability negatively impacts investment, and low investment slows growth.

Second, instability stalls the building of effective institutions, one of the deep determinants of growth (Rodrik 2003). Institutions are important for sustainable economic growth, but without stability, such growth remains utopian. Peter Hall (1986) defines institutions as ‘the formal rules, compliance procedures, and standard operating practices that structure the relationship between individuals in various units of the polity and economy’ (p.938). Institutions provide incentives for investment and structure an economy (North 1991). For instance, the Republic of Botswana grew at 7.7 per cent annually from 1965 to 1998 due to the viable political institutions that guaranteed property rights, law and order, prudent resource management, merit based public bureaucracy, and investment in education, health and infrastructure (Acemoglu et al. 2001 cited in Rodrik 2003).

Third, political instability impedes growth, freedom, and prosperity. Thailand is generally violent, socially divided and overwhelmed by populist movements with a large number of actors capable of blocking reforms (Chambers 2010). These divisive factors prevent the building of democratic institutions like those in Botswana, Japan, South Korean, Singapore, et al (Rodrik 2010). The unstable environment undermines economic growth because Thailand operates as a centralized bureaucratic polity mostly ruled by the military class. In addition to this, ‘parties use ministerial positions to enhance factional power in a continuing process of logrolls’ (Pasuk & Baker, 2000, p. 138), and corruption is widespread in the public sector (Pasuk & Baker, 1998, p. 260). Such governance deficiencies are a result of weak institutions nurtured by instability. As Acemoglu and Robinson (2012) argue, authoritarian, centralized and exclusive institutions, like those in Thailand, have disastrous consequences on growth as they avail no incentives for investment and innovation. Accordingly ‘it is politics, not geography, culture, et al., that determines the economy’ (p. 544). Effective institutions create a level playing field whereby most citizens can enjoy secure property rights, gain access to an independent judicial system, develop their personal capabilities (North 1991), and invest in technology and innovation for steady economic progress (Jones & Romer 2010). Institutions become even more effective when they are inclusive and decentralized.

Last, instability is further compounded by constitutional biases against elected officials. This increases political volatility. For instance, the constitution allows the military and judiciary to appoint and approve independent bodies, such as the National Counter Corruption Commission, the Election Commission, and the Constitutional Court Judges (Thai Constitution 2007). The military can institute marshal law, and effect promotions in its ranks and file (Chambers 2010). The constitution also forbids the Parliament from approving Thai military budget, which sharply rose from ‘US$2b in 2006 to about US$6b in 2011’ (Chambers 2010, p.850). It grants ‘vetos to the non-elected monarch, privy council and the military’ over elected parliamentarians (Chambers 2010, p. 827). Finally, the Thai judiciary sometimes interferes with the parliament by removing prime ministers as was done in 2007, 2008 (Howes & Lopez, 2013, p.8), and 2014 (BBC News 22/05/2014). Such practices increase political instability and slow economic growth in Thailand (Kuhonta 2011).

IV. Decentralisation as a pathway to stability and economic growth

Economic reforms are one of the options for growth in Thailand. According to Jitsuchon (2012), Thailand’s growth relied on ‘cheap labour, and low innovation, with technological acquired mainly through technology importation’ (p.15). As one of the stylized facts of growth predicts, once a state grows towards the technology frontier, its growth slows (Jones & Romer 2010). Thus, Thailand’s old growth model can no longer expand growth. However, if one should rely on economic growth theory, then the country must readjust its economic model. It must diversify production networks (Kharas & Kholi 2011), break monopolistic powers, decentralize governance, and invest in education, research and development to trigger innovations (Jimanez et al. 2012, Acemoglu & Zillibotti 1999). However, all these growth corridors cannot survive amidst political instability in Thailand (Alesina & Perotti 1996).

Consequently, Thai reform agenda must focus on decentralization to create political stability as a precursor to all other reforms. Decentralisation is the transfer of powers from central government to lower levels in an administrative hierarchy (Crook & Manor 1998). It locally provides efficient public goods compared to central government (Oates 1972). Decentralization creates an enabling environment for inclusive political, economic and social reforms because the locals directly lead decision making; it therefore usually promotes political stability. Decentralization gives local authorities the freedom to compete, innovate, and attract investment and technology, which generate local employment, productivity and growth. Employment opportunities drive skills development through education to enhance human capital (TDRI 2012). Enhanced human capital increases productivity and promotes innovation; and all of these factors combined increase growth (Jones & Romer 2010).

To begin the process of decentralization, the current Thai government should constitutionally set up regional governments. The regional governments will comprise locally elected parliaments, premiers and appointed judiciaries. They will manage and support regional and local development programmes, and invest in economic activities like agriculture and industry. The central government would focus on macro level issues like monetary policy and national security. Decentralization might shift attention from Bangkok to regional governments, promote equitable distribution of economic opportunities, increase competition and accountability, enhance trade and investment, and spur innovation. It will stabilize Thailand because the ‘Yellow Shirts’, mainly Southerners, would focus on their regional government, while the ‘Red Shirts’ would concentrate on theirs in the North. The military and political elites in Bangkok would be compelled to address regional demands to gain regional authorities’ support.

While decentralization might increase political stability, increase access to basic services, promote regional competition, and spur growth, it might cause new problems such as a clash in resource allocation between the central and local authorities, and the decline of state macroeconomic management. According to Zhong Zhu Ding (1998), decentralization complicates and disturbs China's growth and development. In September 1995, Chinese President Jiang Zemin said ‘in the process of structural reform, some provinces favoured their local interests and therefore resisted the central government's policies’ (Zhong p.63).  Decentralization in Thailand might therefore weaken central macroeconomic management, and undermine national unity. However, Thailand needs to constitutionally spell out the powers of central and provincial governments to mitigate against the possible drawbacks of devolution.

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