Thai Military Rulers Look to Past For Answers on Economy

August 15, 2014 at 11:17

BANGKOK—In the 1980s, Thailand’s military-backed government oversaw a growth miracle, spurred by the development of heavy industry and Japanese investment. The generals who seized power in a military coup in May are staking their legitimacy on a similar renaissance—but they face a more complex economic backdrop.

Since the coup, the junta has made economic matters its priority. It has paid almost $3 billion in delayed subsidies to farmers. The generals have cleared around a third of a $22 billion backlog in investment projects. And they have announced plans to spend $75 billion over eight years to improve transport infrastructure, linking Thailand with China.

Their goal is to arrest a slump that has made Thailand one of Asia’s worst-performing economies this year.

As a model, they are looking to the government of Prem Tinsulanonda, a former army commander who led Thailand as prime minister in the 1980s, backed by a cohort of technocrats. Gen. Prem, who at 93 years old still wields clout in the military, leveraged Japanese government loans to build roads, rail and industrial parks along Thailand’s eastern seaboard.

A petrochemical industry flourished and the economy was growing by double digits at the end of the decade. Foreign auto makers began to set up in Thailand, turning the nation into the “Detroit of the East.”

“The aim is to get back to the good old days of 1980 to 1988, when technocrats ran the country. There’s a belief, there’ll be government investment-led growth,” said Supavud Saicheua, an economist at Phatra Securities, a Thai stock brokerage.

But it was easier then. Thailand was an impoverished, rural economy, and the government made rapid gains through state spending that encouraged people to move from fields to factories. Southeast Asia was peaceful after years of conflict. Foreign investment poured into Thailand, especially from Japan, whose companies were looking for cheaper production bases.

 

Today, Thailand’s economy is over 10 times its size at the beginning of the Prem era. Since the 1997-98 Asian financial crisis, public spending has failed to boost the economy, according to Mr. Supavud. A state-led growth model is “not as compelling as in the past,” he said.

Backers of the military contend its plans to spend on railways and roads will create construction jobs, spur greater urbanization and fuel new trading opportunities with China.

Still, there are reasons to doubt Thailand’s long-term competitiveness. After booming in the 1980s and early 1990s, the country has failed to develop as quickly since the Asian crisis. As wages rose, Thailand lost low-end production of garments and sneakers to poorer nations such as Vietnam and Cambodia.

Political turmoil has led to under-investment in education, research and infrastructure, stopping the country from moving into higher-end parts of the global electronics supply chain. Exports have stagnated over the past three years. Once-strong sectors like hard-disk drive production are facing tough times as global tastes change. China is starting to eat away at Thailand’s market share in electronics.

Ulrich Zachau, the World Bank’s director for Southeast Asia, says the junta’s focus on high-speed railways and other infrastructure could help reduce business costs. But such spending, he says, must be matched by investment in education to help Thailand catch up with richer neighbors like China and Malaysia.

“It’s ultimately critical for moving up the value chain,” Mr. Zachau said. There’s no evidence authoritarian governments are any better than democratically elected ones at ushering in such changes, he added.

Demonstrators protest against military rule in Bangkok in May. Political turmoil has been a drag on growth. Reuters

The junta’s supporters criticize former Prime Minister Thaksin Shinawatra, a telecommunications billionaire who ran Thailand for five years before the military deposed him in a 2006 coup, for wasting money on populist policies rather than infrastructure. His sister, Yingluck Shinawatra, served as premier until a court removed her from office in May for abuse of power, two weeks before the military coup.

Piyasvasti Amranand, who the army picked in June as chairman of state-owned oil-and-gas giant PTT PTT.TH +0.30% PLC, is urging the junta to cut back on energy subsidies that he says have cost $15 billion over the past three years, and to use the savings to fund its spending plans. “Right now we have higher need for rail systems and better transport links,” Mr. Piyasvasti said in an interview.

Others doubt whether the junta can make progress within a year, after which the generals have intimated they will hold elections. Some parts of their plan have been on the drawing board for decades, including under Ms. Yingluck’s government, but got held up by Thailand’s frequent changes of administration.

“Until you see contracts awarded and projects break ground, I’m not banking on any of them,” said Marc Spiegel, a Bangkok-based executive with Vinarco International, a technical consultancy.

Thailand’s economy, meanwhile, contracted 0.6% on year in the first quarter and is forecast to have slowed further between April and June, which would mark a technical recession. (Official data is due Monday.) Foreign investment applications, by number of projects, slumped by around a third on year during the first five months, and 10% by value. Applications by Japanese companies, the largest investors in Thailand, fell the most.

A credit binge in the past several years has left Thai households with one of the largest debt burdens in the region, which is likely to constrain private spending. Amid weak demand, factories are running at only two-thirds of capacity, limiting fresh investment.

Optimists contend the second half of the year will be brighter. The coup has restored calm to the streets of Bangkok, the capital, after months of destabilizing political protests. An index of consumer confidence rose for a third straight month in July. Thailand’s main stock index is 8% higher since the coup.

“We certainly see growth potential coming back,” said Matt Bradley, president of Ford Motor Co.’s Southeast Asian operations.

Source: https://online.wsj.com/articles/thailands-military-rulers-look-to-past-for-solutions-to-economy-1407820419