Thailand’s military has declared a coup d’etat in the country, in the wake of political turmoil.
Not much can said for the insistence all of two days ago that the action was definitely not a coup.
Thankfully, so far the coup does not appear to be particularly violent.
Though in recent years several Thai protestors have been killed in clashes with other political groups and the police.
On the announcement, the Thai baht dropped by only about 0.4 per cent against the dollar.
The lack of reaction may be because coups in Thailand are not exactly rare, or it may be because the country’s political crisis has already taken the air out of the Thai economy. The country’s stock exchange has suffered on the country’s political crisis over the last year.
But what reaction do economies usually have to the political turmoil of a coup? There’s a rich seam of research on the issue.
Coups slow down economies
In 1994, the World Bank’s Economic Review indicated that growth is typically highest in years where the government continues, and lower in years where it changes - but lowest of all if this change is a coup.
Strangely, the result in one continent is not comparable - growth on average falls negative in years with coups across the rest of the world, but remains solidly positive in Asia.
Pioneering economist Robert Barro found that when controlling for revolutions and coups, the typically negative effect that forceful changes in government had on property rights was a major negative effect on investment and growth.
Or maybe poor property rights cause coups
More recently, Rollin F. Tusalem suggested that the relationship could run in the other direction - that countries coups are less likely in countries with strong property rights.
This is measured by the share of money in their economy that is dependent on the proper enforcement of contracts, as in much of the financial services sector.
The research also reinforces a number of other interesting findings: notably that countries that are primary commodity exporters are also more likely to see coups.
Countries that were formerly British colonies were less likely to see the overthrow of governments, and perhaps crucially for Thailand, countries which have previously had coups are more likely to see further coups.
Tusalem sums up his research:
The better a state protects its property rights, the less likely it is that a coup will occur. States whose citizens engage in a lot of contract intensive activity, reflecting an institutional environment where the state protects property rights, are more than likely not to have experienced a coup event.
Despite the effect on growth, equities can do well
Capital Economics’ Krystal Tan said yesterday:
The optimistic view is that the army’s goal is to use martial law as a way to force the opposing politicalfactions to reach a compromise agreement that can lead to the creation of a functioning government with popular support.
And Tan might be right, despite the generally dreary outlook for growth in countries impacted by coups. Research by Nicholas Bloom indicates that coups actually have a positive impact on stock-market returns - those in his sample involve right-wing militaries overthrowing left-wing governments.
However, Bloom notes that the uncertainty of the coup still drives up volatility - using the example of Pervez Musharraf’s coup in Pakistan, which sent the stock market up 15 per cent, but tripled volatility.