Why We Don’t Have Any Thailand Holdings

The generals that currently run Thailand have just postponed the next election another six months, to August next year. Yet Thailand is nowhere near the most repressive state in our region; Vietnam (where we hold the Market Vectors Vietnam Fund (NYSE:VNM)) and China are both Communist dictatorships. What’s more Thailand has a decent economy, with growth expected this year and a GDP per capita at $14,400 (on IMF data, based on purchasing power parity), well above several other countries we’re invested in. It thus seems like a paradox that we have no holdings there, and I’d like to explain why.

There are good reasons other than morality to prefer investing in democracies such as the Philippines rather than non-democracies. By and large democracies have safety valves allowing the popular will to manifest itself, so the chance of really serious unrest that destroys wealth is less. That’s not to say democracies can’t go bad; Venezuela for example has elected a repressive leftist government under Hugo Chavez and his successor Nicolas Maduro several times since 1998.  Still, the preference for democracies is an economically rational one; even economically vibrant autocracies like China and Vietnam don’t give foreign investors all that fair a shake of the dice.

As investors, one’s criteria should be different for rich countries and poor ones, especially today when the Internet and modern telecoms technology has made it much easier to switch sourcing from one country to another. Rich countries are in continual danger of competition from poorer ones, and if their political system adds costs and inefficiencies, as Japan’s does for example, they will find it difficult to achieve economic growth.

Conversely, a very poor country such as Vietnam can cope with a high level of corruption and undemocratic insider dealing, and still achieve growth; the cost advantages for Intel, for example, in putting a $1 billion chip manufacturing plant there are so great they can afford a few inefficiencies. Only outright conflict prevents growth, and if the country’s poor enough, like Democratic Republic of Congo, with a $700 GDP per capita, even decades-long civil war doesn’t stop it achieving a 9% growth rate this year, according to the IMF.

That’s the problem with Thailand. At $14,400 GDP per capita it’s close to the world average, 15% richer than China and more than twice as rich as Philippines or Vietnam. Hence serious conflict would be very damaging to its economic development. As China has shown, a stable dictatorship might work, but that’s not what Thailand is likely to get.

Most military interventions occur after a weak democratic government has made a real mess of the economy. But that’s not Thailand’s situation. The ousted government of Yingluck Shinawatra, successor to several governments dominated by her exiled tycoon brother Thaksin Shinawatra, was pretty economically capable. 

It had a policy of spreading development beyond the capital Bangkok to rural areas in the north and east, which has been quite successful – growth has averaged about 3% since 2007, in spite of unrest, and is expected to average 3.8% in 2015-16, according to the IMF. Since Thailand suffered a massive debt collapse in 1997-98 because of the overdevelopment of Bangkok real estate, the Shinawatra policy has made sense. However it is very unpopular with the elite, the Thai Royal family and the Army – hence last year’s coup and the current military government, which has put Yingluck Shinawatra on trial for “negligence.”

The Thai military, which is not especially economically competent, has written a new constitution keeping control regardless of electoral verdicts. With a strong opposition likely to win any election, this is a recipe for deep prolonged conflict. China and Vietnam, where autocrats are fully in control, are much less likely to suffer serious unrest. In these circumstances, I intend to pass on Thailand until a government appears that has both sensible economic policies and a decent level of popular consent.