Boston - Coming into the year, all eyes were on countries with elections including India and Taiwan in Asia. But the surprise has been political change in countries without elections. Sheikh Hasina was forced out as PM of Bangladesh by protesters and fled to India. Vietnam's former Minister of Public Security was able to attain both the Secretary General position and Presidency after a series of maneuverings. Thailand's Prime Minister was removed by a Constitutional Court ruling. What do these episodes say about the pitfalls of weakening economic institutions in emerging markets?
The impact of institutional decay is non-linear
Until Hasina proposed a quota system for government jobs in Bangladesh, there was no inkling she was in trouble. Sure, the country's economy and financial system were in a precarious place—FX reserves were falling, the currency had been devalued and an IMF program was required.
Hasina, however, had allegedly paid off the military to secure her authoritarian political position. She also falsely believed that her delivery of infrastructure and garment sector growth would keep her protected. In retrospect, unilateral domestic repression, violence, and corruption were too much. The military ultimately abandoned Hasina and now the country is left in social, political and economic chaos.
Once institutional improvement stops, deterioration often starts
Vietnam has been a standout economic development story thanks to policies favorable for foreign direct investment and manufacturing, but economic institutions lagged the industrial growth. For example, the legal system has only marginally improved and regulation on domestically oriented sectors hasn't been liberalized. The result was corruption, especially in property and infrastructure.
The then Secretary General Trong fought this corruption with a "blazing furnace" anti-corruption campaign led by the Ministry of Public Security. That power allowed then Public Security Minister To Lam to eliminate political rivals and ultimately seize the top political jobs when the Secretary General passed away. Vietnam will continue to thrive industrially, but political observers agree that governance has regressed.
Change is Hard
For decades, Thailand's conservative establishment has actively blocked institutional development and governance improvement. The statistics are well known—13 successful coups and 20 constitutions in the country's modern history. In that context the recent removal of Prime Minister Srettha because of a constitutional court ruling shouldn't be surprising.
Meanwhile, the country's economy continues to slow down structurally. Political attacks on the central bank are becoming normalized. Deindustrialization is taking hold. These are the costs of choosing the status quo over change.
Bottom line: Improvements in a country's institutions are essential for sustainable growth and to lower the risk premium on a country's financial assets. Therefore, political analysis should focus on but not be limited to elections. The big stories in Asia this year have been elsewhere.
