WHEN MANY COUPS TURN THE ECONOMY RESILIENT

Then, as swift as lightning, the military coup on May 22 brought the promise of an end to economic gridlock. But at what cost? We'll stake our professional careers on the following controversial analysis.

How does political instability affect economic growth? Investigating the impact of events such as cabinet changes, constitutional changes, coups and revolutions is a tricky business because causes run both ways. Bad economic performance can bring political instability and vice-versa (think of Greece and Cyprus last year). So it's not usually obvious if coups deter economic growth, although economists generally suppose a negative relationship.

A study by Nauro Campos and Jeffrey Nugent, published in the Journal of Development Economics in 2002, found no evidence of a supposed negative and causal relationship between political instability and economic growth. Covering 98 developing nations between 1960 and 1995, the authors said Sub-Saharan Africa seemed to be the driving force behind the conventional wisdom, despite its statistically weak relationship overall.

A paper by International Monetary Fund (IMF) staff in 2011, on the other hand, suggests higher degrees of political instability are associated with lower growth rates of GDP per capita. In particular, they found that a major cabinet change — regardless of its causes — reduces the annual real GDP per capita growth rate by 2.4 percentage points. For Thailand, TMB Analytics had a pre-coup projection for GDP growth at 2% this year. If the IMF's analysis is correct and we bluntly apply the arithmetic, Thailand might soon experience zero growth or even enter a mild recession.

Yet, such a simple calculation may fail to describe the idiosyncratic reality of each country, including Thailand, and here's why.

Cheaper by the dozen: A fellow emerging market economist who visited us from Sweden last week suggested Thailand had seen so many coups that the economy had become resilient to political instability. An interesting observation, and there are some grounds to believe so.

Indeed, Thailand has seen a dozen successful coups in the past 82 years. There have been three in the past three decades: the 1991 overthrow of Chatichai Choonhavan, the 2006 ouster of Thaksin Shinawatra that began a prolonged period of political uncertainty, and the latest in 2014.

We looked back at Thai data since 1951 when it first became available on the IMF database. Coups showed up in both "good years" — where growth was above trend — and "bad years". There is no obvious pattern. Similar to Campos and Nugent, our statistical analysis also found a weak relationship between coups and GDP growth in those particular years. If anything, it seems that the occurrence of coups reduces persistence in GDP growth. Simply put, it is difficult to predict economic performance in coup years by using only past data and current economic models.

Furthermore, Thailand's strong economic fundamentals provide a cushion to any adverse impact during the current transition. Inflation is stable (expected to average of 2.5% this year), the current account deficit is low (0.7% of GDP in 2013), as is the fiscal deficit (2% of GDP).

Not surprisingly, the credit rating agency Moody's this week affirmed Thailand's Baa1 sovereign rating with a stable outlook, in spite of its prior comments that the coup was "credit negative". Moody's did not cut the country's rating either in 1991 or 2006, but only in times of economic crises.

Some negative effects inevitably will be seen, though. The imposition of martial law, for example, is likely to reduce tourist arrivals that were already heading downward after the government invoked an emergency decree in January. A strategy to restore confidence and attract more tourists is needed promptly, particularly at a time when domestic consumption remains weak.

But generally, things are looking up.

When the money keeps rolling in, you don't ask how: The National Council for Peace and Order (NCPO) has laid out a number of priority projects and stimulus measures. A growth target of 3% has been mentioned. Paying rice farmers is a good start; the total of 92 billion baht may lift 2014 GDP by 0.2 percentage points.

Moreover, plans to start work immediately on selected non-controversial infrastructure projects, including dual-track railways, will accelerate public investment. A total of 112 billion baht from the capital budget is ready to be spent. Overall, public investment disbursement and growth may bolster GDP by an additional 0.4 points. If the NCPO plans bear fruit, we're talking about GDP growth close to 2.5%.

Accordingly, in the eyes of economists, coups may not matter much in themselves. It's what comes afterward that really counts: governance, policies, action plans and execution. For what it's worth, it seems the monetary damages of military coups are far less costly than from a full-blown economic crisis, the typical trigger of ratings downgrades.

Nonetheless, the notion that political instability may not have substantial short-term effects does not allow us to be complacent about long-term challenges. The quality of institutions, the judicial system among them, is an important component of a competitive economy. Had all of our institutions functioned properly, would we have seen so many coups in the first place? Remember, causality runs both ways.

BANGKOK POST
6 June 2014