SIGN UP FOR INSIGHTS

Economy

Economic Restructuring and Political Governance: Challenges for Asia's Emerging Economies

Thursday, January 7, 2021

The interplay between economic transformation and political development has been debated for decades in the context of the East Asian model. George Abonyi of the Sasin School of Management at Chulalongkorn University writes that, in emerging Asian economies such as Thailand, longstanding social contracts are breaking down and enormous strains on governance are mounting due to volatility and uncertainty in the global economy as a result of financial crises, rapid technological advances, shifting competitive advantages, and now the pandemic. As a result, countries must grapple with the complex challenge of delivering effective political governance that will gain the trust of citizens amid the pain of necessary long-term economic restructuring.

Economic Restructuring and Political Governance: Challenges for Asia's Emerging Economies

Indian farmers protest new laws, December 2020: A political governance system that can maintain social consensus during a period of long-term change is essential (Credit: Im_rohitbhakar / Shutterstock.com)

Like other emerging Asian economies, Thailand is facing a political economy challenge. It has achieved sustained economic growth and development driven by manufactured exports – the East Asian model. In recent years, however, Thailand has been losing its comparative advantage based on low-cost labor. To counter this loss, it is looking to transform its production structure to a knowledge-based economy broadly focused on innovation and value creation. 

The requirements for such long-term economic structural transformation must be reconciled with effective political governance. An effective political governance system, essential for long-term economic restructuring, has constructively to accommodate diverse and divergent societal interests. Fundamentally, stable societies are underpinned by some kind of social contract under which people see themselves as members of the same national community with a shared destiny, even if they may disagree on specific elements of policy agendas. 

Implicit is a broad framework for collective behaviour that enables social cohesion, anchored in institutional arrangements relating to the economy (how markets function and the allocation of resources) and politics (how individual and collective responsibilities are defined, divergent interests reconciled, and power exercised). Political governance is part of the social contract between the state and its citizens, embodied in particular political institutions and processes such as the different forms of representative democracy. 

Youthful exuberance, uncertain future - Jakarta, October 2020: The challenge is to re-establish stable social contracts and their translation into effective political governance (Credit: adhitya nurfatoni / Shutterstock.com)

Youthful exuberance, uncertain future - Jakarta, October 2020: The challenge is to re-establish stable social contracts and their translation into effective political governance (Credit: adhitya nurfatoni / Shutterstock.com)

At certain times, societies are under such stresses that norms of the prevailing social contract become ineffective or obsolete. In recent years, the global economy’s growth prospects have been clouded by shifting demand and disruptive technologies such as the Internet of Things (IoT), now accelerated by the Covid-19 pandemic. This has put existing social contracts under great stress in a variety of settings,contributing to a crisis of faith in domestic and international politics, and a loss of confidence in the ability of governments to continue delivering economic growth and improving living standards. 

In response to challenges of an uncertain global economy, Thailand in 2015 launched Thailand 4.0, an ambitious vision aimed at crafting a new national economy. The Eastern Economic Corridor (EEC) Program, the multifaceted development plan to achieve that goalincludes extensive investment in advanced infrastructure (digital technology, logistics and smart cities) and major initiatives to transform industries to diversify the economy’s production base and boost global competitiveness. The focus is on strengthening key traditional sectors such as automobiles and electronics and creating high-value and innovative production capacity for emerging technologies such as biotech and robotics. 

Given the ambitions of the Thailand 4.0 vision, implementing the EEC understandably faces major challenges including the need for significant time and resources to achieve its goals. Private investors, the expected driver of Thailand’s (and Asia’s) economic transformation, require policy stability and coherence over the long term. Complicating the situation is the uneven distribution of benefits and costs inherent in all such restructuring. On the one hand, some organizations and enterprises will benefit directly from investments in advanced infrastructure and high-tech industries. On the other hand, many mostly micro, small and medium-sized enterprises (MSMEs) will benefit less, at least in the short term, as their limited technological capacity and low-skill workforce will be unable to take advantage of the changing economic landscape. 

Policy stability, therefore, requires the maintenance of a social consensus for change. Otherwise, those that feel left behind may attempt to block measures necessary for the national economic transformation to be effective. The political economy challenge to emerging economies in Asia, as reflected in the case of Thailand, is preserving policy stability, which is necessary for long-term economic structural change. A political governance system that can maintain the social consensus during the period of long-term change is essential. 

The political systems in Thailand and in many other economies in the region are clearly under increasing strain. There is, for example, a growing concern that representative democracy may no longer be able to provide the social consensus necessary for implementing economic restructuring. 

Political economy perspective

Discussions of the relationship between economics and politics have tended to focus on whether economic reform such as marketization is likely to lead to political reform such as democratization. Success of state-led and market-supporting economies such as Singapore, and on a larger scale, China, ignited the “Asian values” debate, which promoted the fallacy that economic marketization necessarily leads to political democracy.

Economic performance is not a sufficient foundation for stable political governance – sustainable democracy, for example. It is, however, a necessary condition. In his book The Moral Consequences of Economic Growth, Harvard University economist Benjamin Friedman presents a cogent case that 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. In a democracy, political parties need to build reputations as effective economic managers and voters generally reward parties for strong sustained economic performance. When economies stagnate and confidence in a better future declines, this can lead to increasing doubts about the usefulness of representative democracy and a weakening of relevant political institutions. 

A key role of effective political governance as a critical element of a stable social contract is the efficient and equitable allocation of economic gains and losses – for example, through budgetary processes. During periods of growth, dividing economic surpluses is an easier task politically. When economic growth slows or reverses, the challenge is to share the pain as gains to some groups are readily viewed as losses by others. 

Economic progress therefore plays an important role in shaping politics, however they may be organized. If economic wellbeing and progress are under threat, so too are existing political institutions. Ensuring ongoing economic growth and societal confidence that such progress will continue and that benefits of prosperity will be shared fairly (inclusive growth) are, therefore, necessary conditions for stable political governance.

Loss of faith in political governance

Thailand and other emerging economies in Asia are embarking on a fundamental transformation amid a period of significant global economic and political uncertainty, volatility and change, all the more disruptive due to the pandemic. This, in turn, is shaping attitudes towards social contracts and political governance.

Disruptive technologies such as robotics, artificial intelligence and additive manufacturing are restructuring industries and jobs. An International Labour Organization (ILO) study found that between 2015 and 2025 as much as half the workers in ASEAN economies are at risk of losing their jobs. High-risk sectors include garments, automotive, and electrical and electronic goods – all among key traditional exports of Thailand and other countries in the region. At the same time, shifting competitive advantages due to globalization and fragile prospects for the expansion of global trade are raising questions about where demand will come from to drive future growth, particularly as advanced and developing economies struggle to recover from the Covid-19 crisis.

The uncertain global economic environment, particularly since the 2008 global financial crisis and its prolonged aftermath, has led to the undermining of confidence in existing social contracts and related political governance systems. A large segment of the world’s population, albeit mainly in developed economies in the West, who feel that they have been left behind and that their children face a less secure future, have become broadly disenchanted with economic globalization and liberalization. The widespread and deep impact of the pandemic will further complicate this global economic and political environment.

The implications of fraying social contracts and diminished trust in political governance are reflected in changing attitudes towards democracy. In the Economist Intelligence Unit’s (EIU) 2019 Democracy Index, the average global score for democracy was the lowest since the index was first published in 2006. The title of the Democracy Index 2016 – “Revenge of the ‘deplorables’” – captured the “popular revolt against political elites perceived by many to be out of touch, and failing to represent the interests of ordinary people”. These sentiments reflect a long-term decline in the general trust in government institutions, elected representatives and political parties and leadership in economies around the world. 

Reconciling economics and effective political governance

The challenge is to re-establish stable social contracts in a variety of settings, and their translation into effective forms of political governance. Institutions that support market economic policies, for example, take different forms. Consider the variety of systems in the United States, Europe, China and Singapore. Can there be different forms of democratic institutions that provide policy stability for long-term structural change yet accommodate and reconcile divergent interests that inevitably emerge? The presidential systems of the US and South Korea differ from the parliamentary systems of the United Kingdom, Canada and Japan in both political processes and supporting institutions. Yet all five countries are robust democracies. 

Can there be other forms of representative democracy that fit emerging economies in Asia? Though that big question has yet to be answered, more modest initiatives have proved effective in bolstering societal consensus for economic transformation. The Nordic model offered by Scandinavian countries may hold lessons for emerging economies in Asia. Although policy content has changed over time, at the core of the Nordic social contract is an emphasis on building societal consensus for sharing the inevitable risks of economic transformation. It combines labor-market flexibility with worker security through effective social services, continuing investment in upgrading human capital, and active labor-market adjustment programs. 

This approach has kept Nordic economies at the top of the competitiveness and human-development rankings while maintaining sustainable and diverse democracies. Asian emerging economies can build on lessons from the Nordic model in devising stable social contracts that will need to reflect new work models and dynamic labor markets that increasingly involve non-traditional forms of employment and changing skill demands. 

Similarly, it may be possible to expand the concept of an “innovation economy” beyond advanced science and technology and high-level research and development to support more inclusive growth. In practice, this requires rethinking product-market innovation to make it more accessible to MSMEs that are generally distant from the technology frontier. These firms are the primary source of jobs in the region – in Thailand, for example, they employ over 80 percent of the labor force, mostly lower-skill workers whose jobs are at greatest risk. 

The appropriate innovation approach (akin to the Indian concept of jugaad or “make do” or “quick fix” innovation) provides a potentially useful example, utilizing low and medium technology more within the reach of MSMEs and anchored in realities of emerging-market consumers and those at the bottom of the pyramid. This may also be supported by digital technology such as additive manufacturing (3D printing) that can expand significantly the capacity of MSMEs for innovation for Asian emerging markets. Such initiatives may widen societal support for economic restructuring and would leave fewer individuals and communities feeling left behind. 

The political economy challenge for Asian emerging economies is to devise new social contracts appropriate for a world of shifting globalization and disruptive technology. These, in turn, must be translated into institutions for effective political governance, including suitable forms of sustainable democracy. Political institutions in emerging economies in Asia must accommodate requirements of essential long-term structural transformation for inclusive growth, while also maintaining supportive consensus for change in society. 

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute

Recent Articles

SIGN UP FOR INSIGHTS

Recent Articles