Suppression of Protest Injures Thai Economy : Commerce: With foreign investors spooked, hopes of becoming Asia’s next ‘little dragon’ are set back.

Just two years ago, the sheer speed of Thailand’s economic growth made it appear destined to become Asia’s next “little dragon,” trailing South Korea, Taiwan, Hong Kong and Singapore.

But a hail of army bullets on the streets of Bangkok in May, triggered by anti-military protests, has dimmed hopes of the country becoming an economic dragon any time soon.

The sudden downturn has lessons for Asia’s other rice-growing nations, such as the Philippines and Vietnam, which were once poised to follow Thailand’s rush toward the status of a newly industrialized country (NIC).

Thailand’s quest for NIC status was rooted in an economic boom that began in 1987, following a big change in the yen/dollar exchange rate. Growth rates hit 10%, tourism took off and one Japanese factory opened almost every day. Manufacturing exports were rising 30% to 40% a year.

Thai officials had dreams of turning Bangkok into a financial center for Southeast Asia, a replacement for Hong Kong after 1997.

But the rapid growth was too much for many parts of Thailand, from the too-narrow streets of Bangkok to a weak education system to a tradition-bound leadership.

“Our economy was not used to rising so fast,” says Chalongphob Sussangkarn, head of macroeconomic programs at the Thailand Development Research Institute (TDRI).

“The constraints quickly become evident. The bureaucrats were working in 19th-Century style, causing bottlenecks in building new roads, ports and communications. And we had a serious shortage of skilled labor,” says Thailand’s leading economic forecaster.

But most crucially, Chalongphob adds, “it’s now clear that our economic growth outpaced our political maturity.

“The politicians and military were still operating on rules and assumptions of 10 or 15 years ago, while the political demands of a new middle class were growing at a rapid rate.”

That middle class, based almost totally in Bangkok and known for its mobile phones and designer jeans, is still small in number but big in economic clout. Even though Bangkok has one-fifth of the population, it generates about half Thailand’s wealth and taxes.

“The armed forces and the politicians underestimated the rising demands of this new middle class for responsible and moral leaders,” Chalongphob says. “A whole new set of demands for more democracy was ignored by the establishment. People in Bangkok were fed up with the abuse of power and the manipulation of state television.”

Six months before the May protests, which were led by the middle class, Chalongphob decided for the first time to link his economic forecasts to political uncertainty, a sign that the world considers stability an important precondition to investment in Thailand.

But even his worst scenario was not as bad as what happened after scenes were shown around the world of Thai soldiers shooting dozens of unarmed demonstrators from May 18 to 20. Those video shots have scared off many tourists and investors.

Now, instead of gross domestic product growing an estimated 7.3% this year, TDRI forecasts a rate of 6.8% or less, depending on what happens between the military and politicians after fresh elections in a few months. In the interim, a caretaker government under former diplomat and businessman Anand Panyarachun will try to halt the economic decline.

“We did not foresee how a bad image of Thailand would be projected to the world,” Chalongphob says.

Tourism, which generates 4% of GDP, will likely decline by 10% rather than rise 16% as estimated. “It’s not that easy to quickly bring back tourism, especially Japanese tourists,” Chalongphob says.

Investments will slow from a projected 8% to 12% to a revised 6% to 7%, the rate of more than five years ago, as political uncertainty causes interest rates to rise.

Until now, about 10% of investment has been foreign, led by firms from Japan, Hong Kong and Taiwan. Despite the low percentage, foreign investment has been crucial for manufacturing exports that bring hard currency.

Even before the May crisis, investment was slowing down from a peak in late 1988. “We were on our way to being a NIC. We had low debt, political stability and strong entrepreneurial groups,” Chalongphob says. “But we were hit by a series of events: the Gulf War, then a coup (in February, 1991) and now this bloodshed in 1992.

“We were due for a turnaround, but now we’ve hit a big dip and must start from a low base again,” he adds. Many recent investments were from speculators trying to ride the economic boom, building white towers of condominiums in Bangkok and dozens of golf courses. Many of those may now fail.

While many countries would wish for 6-7% growth, for Thailand it is all gloom and dashed expectations. One reason was the hope that higher and higher growth might eventually lift the incomes of Thai farmers, who comprise a majority of the population.

Even at its peak, the higher economic growth only increased the disparity of wealth, Chalongphob says. Real income did not rise for the poorest Thais, most of whom are dependent on rice and fickle weather.

“The political system must move toward democracy if we are to resolve the economic disparities,” he says.

The wealth gap is expected to widen the next five years, Chalongphob adds, primarily due to an imbalance in education in rural and urban areas. A university graduate earns on average of 4.8 times more than a Thai with a primary school education.

“New industries and tourist businesses want to hire graduates of secondary schools. But even by the year 2000, only 70% or less of the working population will have six years of education,” he says. “The result is that only a few Thais can really benefit from rapid growth.”

In 1990, GDP per capita was $1,420. But in Bangkok it was nearly triple that, while in the poor northeast region it was $500, or about a third of the national average and an eighth that of Bangkok.

The top one-fifth of income earners enjoy 45% of the nation’s wealth, while those in the bottom fifth get only 5%, Chalongphob calculates.