Fixing Thailand’s Economy: Challenges for the New Government

June 4, 2014 Posted by ASEAN Briefing Reading Time: 4 minutes

Last Sunday, Thai coup leader General Prayuth Chan-ocha and Air Chief Marshal Prajin Juntong announced a series of emergency economic measures that will aim to breathe life into Thailand’s struggling economy.

The initiatives outlined by Thailand’s military rulers include short-term initiatives, such as price caps on fuel and loan guarantees for small firms, in addition to more long-term policies such as the development of special economic zones along Thailand’s borders with Myanmar, Laos and Malaysia.

As Thailand is once again subject to military rule, the country’s newly installed government will face a number of key challenges, including restoring stability, improving fiscal conditions, rebuilding business confidence, encouraging increased spending and investment and – perhaps most importantly – unifying a bitterly divided nation with large developmental gaps between the Bangkok-centered urban population and rural poor.

The Rice Subsidy Program: Red Shirts versus Yellow Shirts

One major factor that precipitated Thailand’s political crisis and protests against former Prime Minister Yingluck Shinawatra was her administration’s controversial rice subsidy program.

Under the subsidy program, the Thai government purchased unmilled rice from farmers across north and northeast Thailand at double the market price to increase income in rural regions. Because these farmers make up the majority of the national population, the rice subsidy program generated mass political support from Thailand’s underdeveloped rural regions for the Shinawatra administrations – especially for Yingluck’s now-exiled brother, multi-billionaire and former Prime Minister Thaksin Shinawatra.

Ousted in a bloodless coup in 2006, Thaksin remains influential in the country among his supporters known as the ‘red shirts.’

Although Thailand’s rice subsidy program benefits the rural poor, it is also extremely expensive for the country’s government – costing an estimated US$12.5 billion during its first year of operation and exceeding a cost of US$15 billion, the equivalent of four percent of Thailand’s GDP, this year.

Partly because of its high cost, the program is strongly opposed by the so-called ‘yellow shirts,’ opponents of the Shinawatra family and Peu Thai Party, who distrust what they perceive as a policy of jeopardizing fiscal balances.

Despite plans by Shinawatra to use Thailand’s rice subsidies as a tool for reducing the global supply of rice – by bringing up prices and later selling the country’s stock piles – agricultural exports from Vietnam and India have gradually eroded the country’s competitiveness in the industry.

Consequently, the Shinawatra government struggled to sell its stockpiles and keep up with the expenses involved in storing them. This economic miscalculation, combined with discontent over government corruption and the potential return of Thaksin, provoked the yellow shirts to stage protests against Yingluck’s government and boycott national elections.

Challenges Ahead

As tensions simmered between red and yellow shirts in their bid to control the government, Thailand’s GDP growth fell from 5 to 2.5 percent last year and investments fell 11 percent year-on-year in the final quarter of 2013. The political crisis additionally harmed export production capacity, consumer confidence and the country’s lucrative tourist industry.

To place Thailand back on track for positive economic growth, the new military government must address the country’s fiscal deficit and make several difficult decisions regarding the political and economic interests of the ‘red shirts,’ who are concentrated in Thailand’s rural areas. Maintaining Thailand’s rice subsidy program will likely prove unsustainable for the government’s finances, but reducing subsidy benefits for farmers would also likely provoke protests and political unrest from the red shirts – especially amidst a severe drought in the north and northeast.

For the time being, Thailand’s military government, now known as the National Council for Peace and Order will focus on fostering unity between the red and yellow shirts by establishing nationwide reconciliation centers. Until underlying economic inequality is reduced and more inclusive economic policies formed, however, it is doubtful sincere reconciliation will occur anytime soon.

Since the end of the Second World War, Thailand has oscillated – sometimes violently – between military dictatorships and short-lived democratic governments. Despite this seemingly cyclical instability, Thailand has experienced a number of economic booms in recent years, most notably under Sarit Thanarat in the late 1950s and early 1960s, and Prem Tinsulanonda and Chatichai during the 1980s.

Therefore, as long as Thailand’s new military government is capable of maintaining a semblance of stability and normalcy, foreign investors will still be able to take advantage of the various opportunities for investment and growth the country presents.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email thailand@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

E-Commerce Across Asia: Trends and Developments 2014
In this issue of Asia Briefing Magazine, we provide a comprehensive overview of e-commerce trends across the Asia-Pacific region with a focus on developing markets in Southeast Asia. In addition to analyzing macro-level economic and development indicators that signal the potential for region-wide growth, we explore several rapidly growing markets in-depth while highlighting opportunities for investment in each.