Economic Restructuring & Sustainable Democracy: Challenge to Asian Emerging Economies

By George Abonyi —

Night market in Bangkok in early 2018. Thailand is attempting to improve its infrastructure and logistics via the Eastern Economic Corridor project, but must restore democracy and achieve policy stability for a chance of success. Source: Roberto Trombetta’s flickr photostream, used under a creative commons license.

Along with other Asian emerging economies, Thailand is facing a fundamental political economy challenge. The country achieved sustained growth and development driven by manufactured exports: the East Asian model. However, there have been clear signs in recent years that Thailand has been losing its comparative advantage based on low-cost labor. It must transform its production structure to a knowledge-based economy broadly focused on value creation and innovation. This is further complicated in a world of shifting globalization and new disruptive technologies such as the Internet of Things (IoT) and e-platforms. Thailand’s Eastern Economic Corridor (EEC) is an ambitious multi-faceted program to create a new production structure that responds effectively to domestic and external challenges.

The inherent uncertainty of the complex structural transformation for an economy such as Thailand, along with the long time horizon required and the uneven benefits and costs of the change process, is juxtaposed with the shorter timetable and uncertain outcomes of a democratic political process of elections, often involving shifting societal interests. Yet structural change, reflected in Thailand’s EEC program, requires policy stability over the longer-term; as it involves extensive public and private investment in advanced infrastructure and in upgrading existing and new industries to create the diverse productive base for a globally competitive and growing economy. For example, in infrastructure the EEC involves creation of new types of systems for Thailand such as digital infrastructure and advanced logistics, as well as creating new digitally enabled “smart cities”; and in industry, strengthening traditional key sectors such as automobiles and electronics, and creating new high-value and innovative productive capacity as for example robotics. For programs such as the EEC, private investors, the expected driver of Thailand’s (and Asia’s) economic transformation, favor policy environments that are not subject to frequent changes. Policy stability, meaning coherence of policy decisions over time, is deemed essential for such long-term investments.

The political economy challenge then is as follows. There is a vital need for long-term economic structural transformation in a world of shifting globalization and new disruptive technologies. Policy stability over a long time horizon that is maintained despite the uncertainty of outcomes is essential for such change. But the need for long-term policy stability must be reconciled with the foundations of sustainable democracy. Thailand thus faces a dual challenge – restoring democracy and ensuring policy stability for the economy.

Economic perspective on politics

Basic elements of (liberal) democracy, according to Dani Rodrik, include three types of rights: (1) economic rights, such as property rights; (2) political rights, including participation in free and fair elections, and allowing winners to shape the government’s policy agenda; and (3) civil rights, such as ensuring equality before the law, and protection of minority rights. To this must be added (4) a built-in mechanism for smooth periodic participatory power transition. In Thailand’s case, it still has to get the politics of participatory power transitions back on track following the May 2014 coup, coupled with the needed economic transformation.

Discussions of the relationship between economics and politics have tended to focus on whether economic reform, primarily the marketization of an economy, is likely to lead to political reform, the democratization of the political system. The sustained success of state-led yet also market-supporting economies such as Singapore and on a much larger scale China, ignited the “Asian values” debate, suggesting the inaccuracy  of the belief that marketization leads to liberal democracy.

Economic performance is not a sufficient foundation for sustainable liberal democracy. However, it is a necessary condition. In its strongest form, as cogently presented by Benjamin Friedman in The Moral Consequences of Economic Growth, economic growth, meaning a rising standard of living for the majority of citizens, can foster social mobility, commitment to fairness, and tolerance of diversity, all of which strengthen democratization.  But when economies stagnate, and confidence in a better future declines, this can lead to decreasing confidence in liberal democracy, and weakening of democratic political institutions.

A key role of politics is to allocate economic gains and losses, for example through the budgetary process. In good times of growth, dividing economic surpluses is an easier and more pleasant political task.  However, when economic growth slows, the challenge is to share the pain: gains to some groups are more readily seen as losses by others. Economic progress therefore plays an important role in shaping the success of politics, however organized. If economic well-being and progress are under threat, so are existing political arrangements. Ensuring continued economic growth and progress, and societal confidence in such progress and in sharing the benefits of growth (“inclusive growth”), is thus a necessary condition for sustainable liberal democracy.

Global context

Achieving inclusive growth and continued progress in the present global environment will not be easy. Thailand, along with the rest of Asia, is embarking on a fundamental transformation of its economy in the midst of continuing global uncertainty, volatility, and change. This, in turn, is also shaping attitudes with respect to democracy as a political system.

Growth prospects of the world economy are clouded by uncertain global demand; unsure financial flows to emerging economies; continuing low commodity prices; and the impact of disruptive technologies on global production and employment. Although there are recent optimistic signs, international trade volumes are forecast to continue to fall significantly below global gross domestic product (GDP) growth in coming years.

As East Asia’s exports to slowing developed economies have fallen, particularly to the United States and the European Union (EU), so has trade among countries of the region. Nor is China likely to be the answer.  Its recent imports of around 50 percent of intra-regional manufactures have primarily been parts and components for final exports to developed economies, e.g. inputs for iPhones to the United States and the EU. To become a growth locomotive for Asian manufactures China would need to raise not only its domestic consumption as a share of GDP, but also its imports of final manufactures from the region. However, China’s uncertain economic rebalancing from investment- and export-driven, to consumption-driven growth, even if successful, would not automatically translate into increased final manufactured imports from the region.

Furthermore, technologies such as smart manufacturing are disrupting industries, economies, and jobs. For example, Adidas implemented robotics and additive manufacturing (3-D printing) in two new “Speedfactories” in Germany, and Atlanta, each to produce 500,000 pairs of shoes annually. The result was the elimination of 1,000 jobs in Vietnam, and the creation of 160 technician jobs in each of Germany and Atlanta. Services are also at risk. The Mizuho Financial Group, one of Japan’s leading mega-banks, is a typical example of planning to accelerate the use of digital technology in its operations — and to cut 19,000 jobs in the coming years.

The uncertain global economic environment has important implications for politics and democracy. The Economist Intelligence Unit’s Democracy Index 2016 report “Revenge of the “deplorables”, captures the “popular revolt against political elites who are perceived by many to be out of touch and failing to represent the interests of ordinary people.” This reflects a long-term decline in popular trust in government institutions, elected representatives, and political parties across a wide range of countries.

An important reason for this waning confidence in politics and democracy is economic. It signals declining confidence in the capacity of government to deliver continued economic growth and progress, particularly in the wake of the prolonged economic slump that followed the global financial crisis of 2008. It also indicates a growing disenchantment with economic globalization by a large segment of the population who feel they have been left behind.

To provide vital policy stability for essential long-term economic transformation such as Thailand’s, the political system must be able to generate and sustain over the longer term societal consensus for such change. For societal consensus, economic growth must be seen as inclusive: provide clear and increasing benefits for the majority of the population. The political system then must (1) remain open to recognizing, legitimizing, and accommodating differing interests that are likely to emerge during the economic transformation process; (2) have built-in mechanism for periodic participatory power transition; and (3) yet maintain policy stability and coherence over an extended time horizon and uncertain outcomes.

This raises the question, can liberal democracy also be compatible with a variety of institutional frameworks that equally guarantee fundamental economic, political and civil rights?  Just as economic market-supporting institutions can take different forms, for example in the United States , Europe, China, and Singapore, can there also be forms of sustainable democracy that both provide needed policy stability for long-term economic structural change, and yet accommodate and reconcile divergent interests that inevitably emerge. The Nordic model from countries in Scandinavia is one example that Asian economies like Thailand could consider adapting to local contexts. Although the policy content has changed over time, its essence is a societal consensus on a collective mechanism for sharing the inevitable risks of economic transformation, for example through effective social services, investment in upgrading human capital, and labor market adjustment programs. This approach has kept the Nordic economies at the top of competitiveness rankings, while maintaining vigorous liberal democracies in diverse forms.

The political economy challenge for Asian emerging economies, like Thailand, is then to devise and implement further refinements of sustainable democracy that can accommodate the requirements of essential long-term structural transformation, and also maintain vital on-going societal consensus for change, consistent with basic democratic values.

Dr. George Abonyi, based in Ottawa, Canada, is Visiting Professor at the Maxwell School (Executive Education Program), Syracuse University. This article is based on the Opening Keynote Address, Nineteenth Annual King Prajadhipok Institute (KPI) Congress 2017, “Thai Democracy and New Challenges: the Ideal, Reality and Prospect”, on November 10, 2017, in Bangkok, Thailand.

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