Thailand’s shadow economy among biggest globally

Reading Time: 5 minutes
Bangkok sunset_Arno Maierbrugger
Bangkok at sunset. Thailand’s shadow economy is as high as 40.9 per cent of GDP, experts say – among the biggest in the world. @ Arno Maierbrugger

Ever wondered why Thailand isn’t simply falling apart in its endless spiral of corruption, military coups, over-challenged governments, volatile economic environment, substandard education and poor law enforcement?

It’s the shadow economy, stupid.

It doesn’t take a lot of wits to realise that in Thailand, without its enormous informal sector, little would really work properly. And obviously, despite its claims, the junta cannot change it, as it is obviously deep down in the people’s DNA.

Bloomberg was recently inspired to a feature on Thailand’s shadow economy, pointing at the ubiquitous informal food stalls, street vendors and repair shops during the day and watering holes, street “bars” and open-air hooker venues in the night. These are, of course, all formally illegal businesses. No one pays tax for it, no one is licensed, no one is documented. They just have to pay off certain local officials to run their businesses and the police to “rent” space on the sidewalk. Money that disappears in pockets of people who constitute a food chain of corruption that stretches up to the highest echelons.

Yes, the junta has pulled through a few crackdowns, well covered by the media, but most were rather small-scale. It claims to have “removed” quite a number of officials accused of corruption, but even if so, it hasn’t changed much. And the visible informal sector is just the tip of the iceberg that is made up of tens of thousands of businesses that thrive in darker corners across the country, namely illicit “massage parlours” and similar institutions catering to the domestic clientele which constitute 90 per cent of Thailand’s sex industry, as well as gambling spots and illegal lotteries, street drug trade, smuggling, human trafficking, informal money lending and small weapons trade.

The business is run by locals, with or without involvement of the police, and also by foreign criminals including Chinese triads, Japanese yakuza, as well as South Korean, Taiwanese, Pakistani, Nigerian and Bangladeshi gangs, among others.

Friedrich Schneider, an economist at Johannes Kepler University in Austria who has done studies on underground economies all over the world, estimates that Thailand’s shadow economy accounted for 40.9 per cent of real GDP in 2014, which would have been more than $155 billion in illicit revenue generated. If only taxed by the general seven-per cent value added tax, the government could have brought in almost $11 billion for state coffers, twelve times more than it has earmarked for desperately needed water management projects for 2015 and 2016 to cope with droughts and floods that alternately batter the country.

Bloomberg Business ranks Thailand seventh-biggest shadow economy in the world as per the share of illicit revenue of its GDP. On the list, the “Land of Smiles” appears alongside Peru, Bolivia, Ukraine, Belarus, Tanzania, Zimbabwe, Haiti, Guatemala and the likes, and within Southeast Asia, it tops the list ahead of Cambodia (per cent of GDP in shadow economy: 54.2) and the Philippines (per cent of GDP in shadow economy: 48.4).

Wan, a middle-aged woman who runs a nightly “cocktail bar” consisting of a self-carpentered mobile booze counter, two big ice cube boxes and a few plastic tables and chairs, explains the freaky economics of her business. She had to pay the previous owner of the makeshift “bar” some 300,000 baht (approximately $8,700) for the hardware. She had to negotiate with police for sidewalk space to set up the bar between midnight and dawn and pays 30,000 baht a month “rent” to the cops for it. In addition, people claiming to be from the local administration show up regularly to collect “fees” which add up to another 20,000 baht a month. She also needs to pay people who (informally) organise electricity supply by tapping public power lines or renting car batteries, and who deliver booze and ice cubes.

Revenue depends on the season and can range from as low as 2,000 baht per night and up to 5,000 baht per night in the high season, which – after procurement costs for drinks – means in the first case she makes close to no profit at all, and in the latter that she walks home with about 30,000 baht for the month, half of which goes to her family and/or kids somewhere in rural Thailand.

world-view-of-shadows-economies
The World Bank’s view on global shadow economies. The figures mean the percentage of GDP the informal sector constitutes in a country.

The shadow economy in Thailand is driven not so much by the incentive to evade taxes, as small businesses are not taxed up to an annual taxable income of 150,000 baht. It is rather driven by a desire to evade the law, to avoid payment of social security contributions, to avoid having to meet certain legal labour market standards, such as minimum wages, maximum working hours or safety standards, and to avoid complying with certain administrative procedures, such as business licenses or work permits for foreign staff, who, in Thailand’s shadow economy, tend to flock in mainly from Cambodia, Myanmar, Laos and Vietnam.

But the informal sector is also absorbing a large number of young Thais, particularly children from rural families, who are exiting a – generally speaking – very basic public education system with little skills which leaves them few options on the labour market. Stuck with low-income jobs and monetary demands from their aging parents, who in turn are unable to survive on their meager public pensions, and left with no incentives or opportunities to improve their job situation, the informal sector is actually holding the entire system together.

It is hard to believe that the situation has been more extreme. But Schneider says that Thailand, together with Nigeria, at the end of the 1990s had the world’s largest black economy, accounting for more than 70 per cent of official GDP, a result of complete malfunction of economic policies in the country plagued by endemic corruption, inept governments and, on top of that, the Asian financial crisis of 1997.

In a way, the government seems to accept the informal sector as a constituting part of the country’s economy. Otherwise it would be impossible to release official unemployment rates that have been below one per cent for years, with 0.56 per cent as of end-2014 being the latest officially published figure, a jobless rate among the lowest in the world. The explanation is that the Thai statistics office sees all the people working in the informal sector as “self-employed” or at least “under-employed”, from the street noodle stall owner to the odd tourist souvenir vendor, which keeps them out of the jobless statistics.

In turn, Thailand’s official economy isn’t doing so well at the moment, with business leaders complaining that the government is “too slow” in tackling the economic downturn. Last year, Thailand’s GDP grew by only 0.7 per cent, the slowest in four years and the weakest in Southeast Asia, and this year it would be a surprise if growth climbed above three per cent, economists say. The junta says its crackdown on corruption has disrupted black money flows and thus slowed down the economy, which is a quite bizarre rationale. In fact, for months prior to the coup, Thailand suffered virtual paralysis in policy-making amid political tensions. The junta has struggled to lift growth as exports remain weak, consumption is still subdued and government spending is slow, while at the same time labour costs are on the rise, foreign investments have dropped, reforms in education and investments into research and development remain overdue and the country is losing out on competitiveness in the region.

There are no easy answers and no quick solutions to tackling Thailand’s informal economy. It is very firmly established and is also well integrated into the power structure of police, politicians and local influential people. Controlling or at least limiting the illegal economy is a huge task and would likely take decades to show results, if any.

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[caption id="attachment_25800" align="alignleft" width="300"] Bangkok at sunset. Thailand's shadow economy is as high as 40.9 per cent of GDP, experts say - among the biggest in the world. @ Arno Maierbrugger[/caption] Ever wondered why Thailand isn’t simply falling apart in its endless spiral of corruption, military coups, over-challenged governments, volatile economic environment, substandard education and poor law enforcement? It’s the shadow economy, stupid. It doesn’t take a lot of wits to realise that in Thailand, without its enormous informal sector, little would really work properly. And obviously, despite its claims, the junta cannot change it, as it is obviously deep...

Reading Time: 5 minutes

Bangkok sunset_Arno Maierbrugger
Bangkok at sunset. Thailand’s shadow economy is as high as 40.9 per cent of GDP, experts say – among the biggest in the world. @ Arno Maierbrugger

Ever wondered why Thailand isn’t simply falling apart in its endless spiral of corruption, military coups, over-challenged governments, volatile economic environment, substandard education and poor law enforcement?

It’s the shadow economy, stupid.

It doesn’t take a lot of wits to realise that in Thailand, without its enormous informal sector, little would really work properly. And obviously, despite its claims, the junta cannot change it, as it is obviously deep down in the people’s DNA.

Bloomberg was recently inspired to a feature on Thailand’s shadow economy, pointing at the ubiquitous informal food stalls, street vendors and repair shops during the day and watering holes, street “bars” and open-air hooker venues in the night. These are, of course, all formally illegal businesses. No one pays tax for it, no one is licensed, no one is documented. They just have to pay off certain local officials to run their businesses and the police to “rent” space on the sidewalk. Money that disappears in pockets of people who constitute a food chain of corruption that stretches up to the highest echelons.

Yes, the junta has pulled through a few crackdowns, well covered by the media, but most were rather small-scale. It claims to have “removed” quite a number of officials accused of corruption, but even if so, it hasn’t changed much. And the visible informal sector is just the tip of the iceberg that is made up of tens of thousands of businesses that thrive in darker corners across the country, namely illicit “massage parlours” and similar institutions catering to the domestic clientele which constitute 90 per cent of Thailand’s sex industry, as well as gambling spots and illegal lotteries, street drug trade, smuggling, human trafficking, informal money lending and small weapons trade.

The business is run by locals, with or without involvement of the police, and also by foreign criminals including Chinese triads, Japanese yakuza, as well as South Korean, Taiwanese, Pakistani, Nigerian and Bangladeshi gangs, among others.

Friedrich Schneider, an economist at Johannes Kepler University in Austria who has done studies on underground economies all over the world, estimates that Thailand’s shadow economy accounted for 40.9 per cent of real GDP in 2014, which would have been more than $155 billion in illicit revenue generated. If only taxed by the general seven-per cent value added tax, the government could have brought in almost $11 billion for state coffers, twelve times more than it has earmarked for desperately needed water management projects for 2015 and 2016 to cope with droughts and floods that alternately batter the country.

Bloomberg Business ranks Thailand seventh-biggest shadow economy in the world as per the share of illicit revenue of its GDP. On the list, the “Land of Smiles” appears alongside Peru, Bolivia, Ukraine, Belarus, Tanzania, Zimbabwe, Haiti, Guatemala and the likes, and within Southeast Asia, it tops the list ahead of Cambodia (per cent of GDP in shadow economy: 54.2) and the Philippines (per cent of GDP in shadow economy: 48.4).

Wan, a middle-aged woman who runs a nightly “cocktail bar” consisting of a self-carpentered mobile booze counter, two big ice cube boxes and a few plastic tables and chairs, explains the freaky economics of her business. She had to pay the previous owner of the makeshift “bar” some 300,000 baht (approximately $8,700) for the hardware. She had to negotiate with police for sidewalk space to set up the bar between midnight and dawn and pays 30,000 baht a month “rent” to the cops for it. In addition, people claiming to be from the local administration show up regularly to collect “fees” which add up to another 20,000 baht a month. She also needs to pay people who (informally) organise electricity supply by tapping public power lines or renting car batteries, and who deliver booze and ice cubes.

Revenue depends on the season and can range from as low as 2,000 baht per night and up to 5,000 baht per night in the high season, which – after procurement costs for drinks – means in the first case she makes close to no profit at all, and in the latter that she walks home with about 30,000 baht for the month, half of which goes to her family and/or kids somewhere in rural Thailand.

world-view-of-shadows-economies
The World Bank’s view on global shadow economies. The figures mean the percentage of GDP the informal sector constitutes in a country.

The shadow economy in Thailand is driven not so much by the incentive to evade taxes, as small businesses are not taxed up to an annual taxable income of 150,000 baht. It is rather driven by a desire to evade the law, to avoid payment of social security contributions, to avoid having to meet certain legal labour market standards, such as minimum wages, maximum working hours or safety standards, and to avoid complying with certain administrative procedures, such as business licenses or work permits for foreign staff, who, in Thailand’s shadow economy, tend to flock in mainly from Cambodia, Myanmar, Laos and Vietnam.

But the informal sector is also absorbing a large number of young Thais, particularly children from rural families, who are exiting a – generally speaking – very basic public education system with little skills which leaves them few options on the labour market. Stuck with low-income jobs and monetary demands from their aging parents, who in turn are unable to survive on their meager public pensions, and left with no incentives or opportunities to improve their job situation, the informal sector is actually holding the entire system together.

It is hard to believe that the situation has been more extreme. But Schneider says that Thailand, together with Nigeria, at the end of the 1990s had the world’s largest black economy, accounting for more than 70 per cent of official GDP, a result of complete malfunction of economic policies in the country plagued by endemic corruption, inept governments and, on top of that, the Asian financial crisis of 1997.

In a way, the government seems to accept the informal sector as a constituting part of the country’s economy. Otherwise it would be impossible to release official unemployment rates that have been below one per cent for years, with 0.56 per cent as of end-2014 being the latest officially published figure, a jobless rate among the lowest in the world. The explanation is that the Thai statistics office sees all the people working in the informal sector as “self-employed” or at least “under-employed”, from the street noodle stall owner to the odd tourist souvenir vendor, which keeps them out of the jobless statistics.

In turn, Thailand’s official economy isn’t doing so well at the moment, with business leaders complaining that the government is “too slow” in tackling the economic downturn. Last year, Thailand’s GDP grew by only 0.7 per cent, the slowest in four years and the weakest in Southeast Asia, and this year it would be a surprise if growth climbed above three per cent, economists say. The junta says its crackdown on corruption has disrupted black money flows and thus slowed down the economy, which is a quite bizarre rationale. In fact, for months prior to the coup, Thailand suffered virtual paralysis in policy-making amid political tensions. The junta has struggled to lift growth as exports remain weak, consumption is still subdued and government spending is slow, while at the same time labour costs are on the rise, foreign investments have dropped, reforms in education and investments into research and development remain overdue and the country is losing out on competitiveness in the region.

There are no easy answers and no quick solutions to tackling Thailand’s informal economy. It is very firmly established and is also well integrated into the power structure of police, politicians and local influential people. Controlling or at least limiting the illegal economy is a huge task and would likely take decades to show results, if any.

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