• In Thailand, political instability threatens new opportunities in Southeast Asia

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    The popular unrest that has brought Thai politics to a standstill is not particularly remarkable; political instability in the country has occurred cyclically over the past decade, and it shows no sign of abating anytime soon. What is remarkable about the current bout of turmoil is that it could prevent Thailand from benefiting from emerging economic developments in Southeast Asia.

    Over the past century, Thailand’s geopolitical advantages, namely its strategic location and ethnic and cultural influence, have conferred on the country a regional leadership role. But Southeast Asia is changing: Manufacturers are leaving China as it moves up the value chain, the region is slowly integrating economically, the United States is turning its attention away from the Middle East toward the Asia-Pacific region, and Beijing is trying to expand its influence in Southeast Asia. If instability persists, Thailand may not be able to lead or even benefit from these new regional realities.

    Since the 2006 military coup, Thai politics has become predictable. Political forces use public protests to forward their agenda, governments fall amid protests or military intervention, and a new election is held. Thailand’s political cycle is partly a result of the country’s inherent insolubility, whereby elites in Bangkok traditionally have ruled the more populous but politically marginalized rural regions. But now, the rural masses are finding the power to select representatives who do not conform to the traditional political-economic model.

    Thailand benefits from its location and geography. Located in the heart of Indochina, what eventually became Thailand emerged as one of the most powerful kingdoms in Southeast Asia, once wielding ethnic and religious influence from northeastern Myanmar to Laos. Its geopolitical advantages helped Bangkok manage Western colonization, communist revolution and the internal turmoil that plagued most of its neighbors throughout the 20th century. As Asia became more industrialized, Thailand’s access to the sea, its accommodative policies for foreign trade and its relatively advanced infrastructure enabled the country to develop faster than many of its neighbors. Thus, Thailand became a key player in the region and in the eyes of Western powers.

    Losing credibility
    But the ongoing instability may be obviating Thailand’s geopolitical advantages. The country has demonstrated a strong ability to weather its political uncertainties and has remained attractive to foreign investors despite the unrest, but the current protests are taking place amid several changes in the region.

    The most notable change concerns economic shifts in China, which has long been the preferred destination for low-end manufacturing. Production costs are rising, and Beijing’s attempt to move up the value chain has forced many international manufacturers to look for alternatives.

    Over the past decade, Thailand’s comparatively skilled labor pool, robust infrastructure and large consumer market have made the country an important player in the global manufacturing supply chain. Even though Thailand’s minimum wage (about $230 per month) is higher than that of some of its neighbors (Vietnam’s is $90-$127 per month, and Indonesia’s is $80-$120 per month), its skilled labor force has placed it among the world’s leading manufacturers of auto parts and electronics—and thus, a potential destination for manufacturers that want to operate somewhere besides China. The country is particularly attractive to Japanese manufacturers. Japanese companies accounted for more than half of Thailand’s foreign direct investment in 2012, and Japanese companies are curbing production in China after posting losses due to ongoing tensions with the Chinese.

    Prolonged protests in Thailand could force some manufacturers to reconsider their expansion plans. Although Bangkok has continued to secure stable foreign investment for the past seven years, its investment growth is lower than that of regional competitors such as Malaysia, Indonesia and Vietnam. Moreover, Japanese investors’ shift from China has yet to translate into more robust growth in Thailand, as it has with its peers.

    Already, the Japanese Chamber of Commerce in Bangkok has issued a statement saying that Thailand may be losing credibility among foreign investors. Combined with Thailand’s existing economic concerns—growing financial volatility, slowing growth, depreciated currencies and outflowing capital—the political uncertainties could prevent Bangkok from capitalizing on regional economic developments.

    The political instability is also casting doubt on Thailand’s commitment to some key regional infrastructure projects and investments at a time when neighboring countries are emphasizing closer integration. An active member of the Association of Southeast Asian Nations, Bangkok believes that better regional connectivity could support its vision of becoming a regional trade hub connecting Southeast Asian nations to China.

    Thailand’s ambition was endorsed by Beijing, which wants to extend its reach into Southeast Asia. Over the past two years, China has revived a few key infrastructure projects, including a high-speed railway connecting its southwestern regions to Laos and Thailand, through which it hopes to connect farther into the Malay Peninsula.

    Other projects include roads connecting Myanmar and Thailand and a joint venture in the port of Dawei on Myanmar’s southeast coast.

    But those projects either lack funding or have been postponed because of the political crisis. With a functional government unlikely to be installed soon, the uncertainty surrounding these projects will continue to concern regional players and could jeopardize Thailand’s plan of becoming a regional hub.

    An unreliable partner?

    The political upheaval could also affect Bangkok’s ability to benefit from the renewed strategic pivot in Southeast Asia, both from United States and China. As Washington widened its engagement with Southeast Asian partners, particularly in the maritime sphere, it expanded its alliances with Indonesia, Singapore and the Philippines and extended cooperation with others, including Vietnam and Cambodia. The Thai-US strategic alliance remains robust, but the renewed engagement from Washington has yet to really benefit Thailand. The instability also reminds Beijing that it may have to re-evaluate its expansion plans in Southeast Asia if its chosen partner is no longer a reliable one.

    Regionally, there is also a strategic element to Thailand’s instability. So long as the crisis continues, the issue of royal succession lingers. Moreover, some regional partners may take advantage of Thailand’s vulnerability. If Bangkok continues to focus inward, its regional competitors, such as Myanmar and Vietnam, may have the freedom to pursue their strategic priorities unobstructed. Others may find room to expand their manufacturing bases as they become more competitive. Either way, prolonged instability probably will bode ill for Thailand economically and strategically.

    Republishing by The Manila Times of this analysis is with express permission of STRATFOR.

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