[ISSUE 36] - Interesting Things...

Mod Note (Andy) - "Interesting Things" by user Adventure_Capitalist (a PE professional) is a new addition to the site that we hope to have each week. This is a newsletter that he has been sharing between friends for awhile now and we thought it would be a good addition to the site, similar to what Bonus Bananas had to offer

@GSElevator – #1: Millennials push $15 min wage, so McDonald's adds 2k self-serve kiosks & says with smirk: ‘Millennials prefer a screen to human interaction’.

1. Quote Of The Week / 2. Competitive Disadvantage For Thai Exports / 3. Interesting Links / 4. Joke Of The Week

1. QUOTE OF THE WEEK

It is true that income inequality has kind of gotten worse, but you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it. What really matters is growth. It’s not right to say we’re worse off… If you go back 20 years ago, cars were worse, the air was worse. People didn’t have iPhones.” – Jamie Dimon

Thanks Jamie, but not sure about the air. From my desk in Singapore earlier this week:

2. COMPETITIVE DISADVANTAGE FOR THAI EXPORTS

The Economist Intelligence Unit Reports…

Thailand is mainland South-east Asia's largest economy. For many firms, it has become the production centre for this region. The country's consumer market is also bigger than all of its neighbours, three of which—Myanmar, Laos and Cambodia—are among the fastest-growing economies in Asia. The World Bank's Doing Business 2015 report ranks Thailand 26th out of 189 countries. But a combination of seemingly unbounded military rule, policy uncertainty and slowing growth in China means that Thailand's position as the pre-eminent economy of the region is not assured, with other members of the Association of South-East Asian Nations (ASEAN) catching up rapidly.

Thailand's economy is often diagnosed as being stuck in the middle-income trap—a situation where a country has lost its competitive advantage to export because wages are too high. Indeed, merchandise exports are set to fall for the third consecutive year in 2015. Economic growth has generally been slower in Thailand than many of its regional competitors since the 1997–98 Asian financial crisis. To a degree, this growth moderation is normal. Thailand is mainland South-east Asia's only upper-middle-income country. Vietnam, Laos, Cambodia and Myanmar are yet to reach a similar level of economic development. But it would be false to describe the country's predicament as inevitable. To a large extent, it is self-inflicted.

As the region mulls the idea of greater economic integration with the ASEAN Economic Community, which is expected to come into being in 2016, three factors are likely to determine Thailand's prospects and progress towards a more integrated region.

Political uncertainty

Thai politics has been volatile for most of the 2000s, with a constant struggle between populist governments and the conservative elite disrupting policy making and the economy. Government shutdowns and military coups have been common in recent years and the investment environment has suffered. The private investment index of the Bank of Thailand declined for most of 2013 and 2014. The May 2014 coup and the subsequent military-led government promised to revive investment and have restored a semblance of policy normalcy. However, the uncertainty over the nature of a new administration once the military government runs out of steam still lingers. Its two-year roadmap for a return to democratic rule has been altered repeatedly and it now seems that a return to some semblance of democracy will not take place before 2017. If parliament approves an undemocratic constitutional draft later in August, it could still be rejected in a referendum. This will mean that another constitution would have to be drafted. Alternatively, if the legislature strikes down the constitutional draft, this would delay a referendum, as a new constitution would have to be drafted at that stage.

Revealingly, the army chief, Udomdej Sitabutr, has said that the new elections may be postponed because of unspecified events. This has been interpreted as a reference to the seemingly imminent passing of the ailing 87–year–old monarch. A mourning period is likely to be years rather than months. Some think that a contested succession might aggravate the political turmoil and give the army an excuse to extend its rule further. Furthermore, the August 17th bombing in central Bangkok that killed around 20 people, including many foreign tourists, could exacerbate the military's grip on the grounds of re-establishing peace and order in the country.

Vulnerabilities in the economy

Political uncertainty leads to a deterioration of domestic operating conditions. Many firms are concerned about the prospect of years of slow growth, unexpected changes in government legislation and policy choices that limit income growth in Thailand's provinces—the source of much of the growth in recent decades. A particular worry is that the junta may be relying too heavily on encouraging higher consumption for the urban population, which focuses on investment and spending in urban areas, especially greater Bangkok, while failing to create economic conditions that raise the incomes of the vast majority of Thais who live in the countryside.

At this juncture, the Thai economy is at risk of stagnation, as the traditional drivers of growth are weakening. Exports have suffered from low global commodity prices and weak demand. Some goods have also been hurt owing to the relative stability and strength of the local currency, the baht, against the US dollar and that of the rest of the region. In addition, it remains to be seen the extent to which the bombing in central Bangkok will impact the economy. Short-term instability in the capital markets along with cautious investment sentiments and lower tourist arrivals can be expected in the forthcoming months. The Bank of Thailand has traditionally preferred to defend the baht in a bid to allow the middle and upper classes to buy their dollars cheaply (and keep the value of their often foreign-denominated debts stable). However, should the BOT deem that the impact of the bombing will have a deeper impact on growth there is a significant likelihood that it will prioritise the economy over the currency.

Hesitations toward free trade will be costly

Finally, military rule may increase Thailand's reluctance to enter into trade agreements that would benefit the economy but harm oligopolists in particularly protected sectors, such as telecommunications, financial services and agricultural products. Many other players in the region are becoming active participants in trade agreements and this could further dent Thailand's competitiveness in comparative terms. For instance, Vietnam, which is emerging as a fierce competitor, is expected to be part of the US-led Trans-Pacific Partnership (TPP) and has already completed a free-trade agreement with the EU (which, in the meantime, has halted negotiations with Thailand and is also considering imposing bans on certain Thai exports owing to concerns over labour practices).

Firms across Asia have taken notice of these changes in market access and have already moved their production capacity in expectation of the impending shifts in competitiveness. Economically, it would be in the interest of Thailand to open up its trading channels further. Not being part of the TPP, for instance, will make it less attractive as a production centre. This is particularly true for Japanese manufacturers, which represent the core of Thailand's industrial economy.

Now more than ever, Thailand needs to gain a fresh perspective on its waning economic fortunes and break away from the traditional growth strategies that it has been relying on. None of this will be possible unless it restores a political system that assures policy continuity, internal security and a generally stable business environment that is open to change and new avenues of growth.

3. INTERESTING LINKS

Bottom fishing in Brazil [FT]; An engineer’s proposal to shorten queues [Quartz]; 3G Capital and Jorge Lemann: The firm behind your beer and burgers [NY Times] and the man behind the firm [Business Week]; Interview with Xi Jinping – Full Transcript [WSJ];

– Trailer [Youtube]; McDonald’s defunct franchise model [Bloomberg] their new organic burger [Quartz] and an intern’s guide to eating it [fivethirtyeight]; Investment Outlook [Bill Gross]; Why aren't we inspired by Hilary Clinton [The New Yorker].

4. JOKE OF THE WEEK

 

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