Political Instability in Thailand. Which Effects Does it Have on the Economy of the Country?

Term Paper, 2018

21 Pages


Table of Contents

List of Figures

List of Tables

1 Introduction

2 Literature Review
2.1 State of the Art
2.2 The Relationship between Political Instability and Economic Growth

3 Analysis of the Political and Economic Situation in Thailand
3.1 Politico-historical Background
3.2 Economical Background

4 Analysis of Indicators
4.1 Fragile States Index
4.2 The World wide Governance Indicators

5 Conclusion

Works Cited

List of Figures

Figure 1: Annual GDP growth rate in %, Source: Bank of Thailand

Figure 2: FSI Compared to the Number of Tourists

Figure 3: FSI Compared to the Gross Capital Formation

Figure 4: FSI Compared to the Household Final Consumption Expenditure ... 11 Figure

5: WGI Compared to the Number of Tourists

Figure 6: WGI Compared to the Gross Capital Formation

Figure 7: WGI Compared to the Household Final Consumption Expenditure

List of Tables

Table 1: Fragile States Index Indicators, Source: Found for Peace

Table 2: The Worldwide Governance Indicators, Source: Worldbank

1 Introduction

Between 1932 and 1997, Thailand had twenty-four governments, often emerging in the wake of major political crises. During these years, Thailand went through ten coups and sixteen failed coup attempts (Ramsay, Morell, & Samudavinija, 1981). Accordingly, the average tenure of a Thai government has been about twenty-four months. The longest survived one hundred months, under Prem Tinsulanonda (16th Prime Minister between 1980 and 1988) the shortest, under Suchinda Kraprayoon (19th Prime Minister between 7 April 1992 and 24 May 1992), only two months.

Historically, Thailand had, as shown in Figure 1, largely positive growth rates of between five and ten percent. Thailand's economy has grown increasingly over the last 25 years. Except for two major events, the Asian financial crisis in 1997 and the global economic crisis beginning in 2007. However, it can be said that economic growth in recent years has increased, despite the above-average number of changes of government and military coups.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Annual GDP growth rate in %, Source: Bank of Thailand

Political instability leads to greater uncertainty for economic actors within instable countries and can lead to fewer investments being made. The investment climate is suffering from violent conflicts such as civil wars, wars between nations, politically motivated attacks, coups d'états. Also frequent changes of government can generate uncertainty (Obinger, 2004).

What are the consequences of these frequent changes of government on the domestic economy in Thailand? Is political instability likely to have a positive effect on economic growth? Against this background I would like to examine in this paper the extent to which political instability affects the economy in Thailand.

This paper is organised as follows. First, I will explain in chapter 2 the concept of political instability and the link to economic growth as presented in recent literature. In chapter 3, I will describe the political and economic history of Thailand. In chapter 4, I will analyse the relationship between political instability and economic growth within Thailand using selected indicators.

2 Literature Review

2.1 State of the Art

In the following literature research I examine the numerous literature on the relationship between political instability and economic growth. In selecting the papers to be included in this literature research, I used keywords such as "political instability and economic growth", "Thai economy" and "political instability in Thailand" in Google Scholar. From the broad spectrum of available papers, I have focused my selection on a number of academic papers. I chose papers with a high number of citations because they were an indicator of classical works in this field. On the basis of a small selection of articles, I have referenced the core quotations of the individual articles and expanded my selection of literature accordingly. I have also used the university’s library and searched for literature under the heading "Political Economy".

2.2 Th e Relationship between Political Instability and Economic Growth

Many studies examine the relationship between political instability and economic growth. Many of them observe a negative impact of political instability on economic growth. Political instability is often associated with unrest or military coups and can therefore lead to uncertainty among investors, as they need a stable political framework for long-term investment decisions.

Moreover, political instability can reduce a country's political standing and credibility. In addition, the perspective for politicians to be in office only for a short time could mean that they may be pursuing a short-sighted policy (Obinger, 2004). According to Gupta (Gupta, 1990), there are two lines of argument after which political instability inhibits economic growth: “The presence of political instability affects the economic performance in two different ways. First it introduces an additional dose of environmental uncertainty to a natural jittery market.”

Alesina et al. (1996) define political instability as the tendency of a government to collapse. They use variables such as the number of years without a change of government, a variable describing regular and irregular changes of government that had an enormous impact on the political ideology of the government and a variable that records the number of coups. Feng (1997) defines political instability as the probability of regime change. Furthermore, he considers it necessary to distinguish between the stability of the regime and the government and introduces the differentiation of irregular political changes, large regular political changes and small regular political changes.

Serious political conflicts such as wars or coups often lead to the erosion or collapse of public order, loss of the state monopoly on the use of force, the erosion of the rule of law and to uncertain economic rights of disposal and ownership due to a lack of legal certainty. Barro (1991) forms his index of political instability from the number of revolutions and coups per year. Alesina and Perotti (1996) use for their socio-political index the number of violent incidents due to political unrest. Among other things, this index uses the number of successful and the number of attempted but unsuccessful coups d'états, the number of politically motivated murders, the number of people killed due to mass violence. Gupta (1990) has used similar indices to study the relationship between political instability and economic growth, savings or investment.

Some of the studies observe a negative effect of political instability on economic growth. Alesina et al. (1996) see a clear inhibition of economic growth through political instability. They see non-constitutional changes of government, such as a coup, as having a significantly stronger effect on economic growth than regular changes of government. This applies to both democratic and non-democratic governments. Alesina and Perotti (1996) show in their study that income inequality leads to increased political instability and thus inhibits investment. Investment decisions extend over a long period and are associated with costs that are caused by the current renunciation of consumption. However, these are opposed by uncertain future earnings. Time- inconsistent policies make it more difficult for investors to calculate future returns and make it more likely that investments will be stopped, diverted to stable countries or at least postponed (Schneider & Frey, 1985). Not only is the decision to invest withdrawn, it can also lead to a flight of capital and in the worst case to a brain drain (Fosu, 1992).

Feng (1997) sees a negative effect on economic growth in the probability of a change of government, politically motivated murders and a lack of economic freedom.

However, not all studies see a negative correlation between political instability and economic growth. It can be argued that a high frequency of changes of power generates political uncertainty and, as mentioned above, may hold back investments. According to Obinger (2004), however, this is not necessarily the case in mature democracies. Bueno de Mesquita (2000) sees a positive effect of political instability on economic growth and even calls it a "source of economic growth". He distinguishes political instability into two types, the term of office of the political elite and the stability of the institutional framework, whereby the term of office depends on the respective regime type. Political stability is supposed to be found where long terms of office prevail, which is typically the case in autocracies. There, the survival of the elites depends only on a small number of political supporters. Whereas the survival of democratically legitimized elites depends on a much larger group of people, it is "bought" through the production of public goods such as the rule of law (Obinger, 2004). Democratic elites do not have full loyalty due to corruption or nepotism and must therefore compete for more successful policies to maintain their power. The consequence is that they work harder for successful politics, experience less loyalty and are therefore more frequently voted out of office. According to this interpretation, frequent changes of power are by no means a bad influence on economic growth, but rather an elite competition for the best policy.

Gupta's second argument is that political instability has a direct negative impact on the production process and thus slows economic growth Gupta (1990): “Second, political instability interfers directly with the production process itself. For instance, as a result of political instability mines and factories are often shut down because of strikes and sabotage.”

It is obvious that violent conflicts can lead to a possible destruction of human, material and social capital and thus directly influence the production process negatively. However, a distinction should also be made here between the short-term and long-term effects of violent political conflicts. Short-term effects can be demonstrated, for example, by acts of war and the resulting reduction in production output. If stable political conditions can be established after the end of the war, there may be considerable growth potential in the long term due to the need for reconstruction (Obinger, 2004).

In summary, it can be said that political instability in the current literature has predominantly negative effects on economic development. However, the forms of political instability as well as short and long-term effects must be clearly distinguished. Frequent changes of government in a democracy do not have to have a negative impact on economic growth, nor do temporary periods of violent conflict have to slow economic growth.

3 Analysis of the Political and Economic Situation in Thailand

In order to better classify the analysis in Chapter 4, I will briefly explain the political and economic situation of Thailand of the past and the present.

3.1 Po litico- h ist o ric a l Background

In 1932 after a non-violent coup by the military, the absolute monarchy had been transformed into a constitutional monarchy. 1944 the military dictatorship ended and a new civilian government was formed. In 1947, a military government under Pibul Songgram took power again as prime minister for 10 years. Until 1973, Thanom Kittikachorn (1957/58, 1963-73) and Sarit Thanarat (1958-63) were two dictatorial heads of government: they imposed martial law on the country, banned political parties and suspended the constitution. In 1973, after student unrest in Bangkok, numerous political parties and a civilian government were founded, but only three years later they were replaced by a military government. In the following years there were numerous further changes of government, which were only partly due to election results.

In the parliamentary elections in January 2001, the billionaire and former minister Thaksin Shinawatra won against Leekpai. Despite an ongoing corruption trial, he was appointed new Prime Minister. Thaksin was re-elected in 2005, but accusations of electoral fraud, populism and corruption continued. After his defeat in the early elections in 2006, Thaksin did not withdraw from office, contrary to his promise and despite massive protests. Only in September 2006 he was overthrown by a bloodless military coup under the leadership of Lieutenant General Sonthi Boonyaratkalin and went into exile. In October 2006, at the request of the so-called "Council for National Security", the King confirmed Surayud Chulanont as the new head of government of a transitional government. The new constitution put to the vote by the transitional government was approved by the people with only a narrow majority in August 2007. In the same month the supporters of the overthrown ex-premier Thaksin founded the party Phak Palang Prachachon ("People's Power Party", PPP) as the quasi successor of the banned Thei Rak Thai ("Thais love Thais", TRT). The PPP emerged as the clear winner of the election to the House of Representatives in December 2007. Its head Samak Sundaravej was elected Prime Minister at the end of January 2008.

In the following months there were repeated protests against Samak. At the end of August, the situation escalated after thousands of Royalist People's Alliance for Democracy (PAD) supporters occupied the Prime Minister's office and several ministries. There were heavy street battles between government and opposition supporters. Samak, who refused all demands for resignation, had to resign in September. Parliament elected Samak's brother-in-law Somchai Wongsawat (PPP) as his successor. As a result, Bangkok experienced the worst unrest in Thailand for more than 15 years. At the end of November, demonstrators occupied Bangkok's main airport. Finally, the Constitutional Court ordered the dissolution of the PPP for electoral fraud, and Prime Minister Somchai had to resign. In December 2008, the parliament elected Abhisit Vejjajiva of the opposition PAD as his successor.

In spring 2010, the so called "red shirts" (Representative of the United Front for Democracy and Against Dictatorship, UDD) occupied several streets in Bangkok. The so-called "Red Zone", in which the UDD activists had entrenched themselves, was finally forcibly evacuated by the military. About 90 people died in the riots, about 2000 were injured. After the House of Representatives was dissolved by royal decree, a parliamentary election took place in July 2011. The winner was Yingluck Shinawatra, a sister of Thaksin Shinawatra, who led the "Pheu Thai Party" (PTP). After street demonstrations by the opposition from October 2013 and the resignation of the opposition members of parliament, Yingluck dissolved the parliament in December 2013. New elections were held in February 2014. However, as many constituencies were unable to elect, they did not produce a new parliament. Already in January and February 2014 parts of Bangkok had been closed by the demonstrators. At the beginning of May, the Constitutional Court dismissed the Prime Minister and several cabinet members. On May 20, General Prayuth Chan-Ocha, the commander-in-chief of the army, imposed martial law. Two days later he made a coup and placed the country under direct military rule (Bolzen).

General Prayuth Chan-Ocha is still in office today. Democratic elections are planned, but the date of the elections has been postponed more often. They are now scheduled to take place at the beginning of 2019 (Wongcha-um & Setboonsarng, 2018).

3.2 Economical Background

Over the last four decades the economy in Thailand has made remarkable progress, so the World Bank has officially upgraded Thailand in 2011 from a lower-middle income economy to an upper-middle income economy. World Bank Senior Economist Kirida Bhaopichitr says: “The upgrade is in recognition of Thailand's economic achievements in the past decade in which GNI (Gross National Income) per capita has almost doubled, while poverty has been significantly reduced”.

Thailand’s economy grew at an average annual rate of 7.5% in the boom years of 1960 to 1996. Especially in the years between the early 1980s to the mid-1990s, the country recorded strong economic growth based mainly on exports. The Asian financial crisis in 1997 was again followed by years with an average growth rate of 5%. After average growth slowed to 3.5% in 2005-2015 and dropped to 2.3% in 2014-2016, Thailand is now on the road to recovery. At 3.9 %, economic growth in 2017 reached its best growth rate since 2012 and is expected to increase further to 4.1 % by 2018 (Worldbank, 2018).


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Political Instability in Thailand. Which Effects Does it Have on the Economy of the Country?
RWTH Aachen University
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political, instability, thailand, which, effects, does, have, economy, country
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Julius Henke (Author), 2018, Political Instability in Thailand. Which Effects Does it Have on the Economy of the Country?, Munich, GRIN Verlag, https://www.grin.com/document/490002


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