THE ECONOMIC DIMENSIONS OF THAILAND'S SOUTHERN

C O N F I D E N T I A L SECTION 01 OF 06 BANGKOK 007511

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/20/2016
TAGS: ECON PTER PINS TH
SUBJECT: THE ECONOMIC DIMENSIONS OF THAILAND'S SOUTHERN
INSURGENCY


Classified By: Embassy Charge Alex A. Arvizu; Reason: 1.4 (b) and (d)


1. (C) Summary: While economic factors are not the root
cause of Thailand's southern Islamist insurgency, there are
important economic dimensions to the Southern crisis that, if
effectively addressed, could make a contribution to the
solution. Existing official statistics for the South present
an incomplete and misleading picture of economic conditions
there, obscuring wide gaps between ethnic Malays and ethnic
Thais in income and employment. The high levels of violence
make new investment out of the question; more seriously, the
region's existing investments are slowly collapsing under the
weight of the insurgency. The best that can be hoped for
currently is a "stabilize the patient" approach which seeks
to maintain the region's existing investment, buying time for
the RTG to implement effective policies aimed at eventually
reducing the level of violence and creating conditions for
sustained economic development. The RTG's recent decision to
designate the three Southern provinces as a Special Economic
Zone (SEZ) with tax breaks is a step in the right direction,
but additional measures may be necessary. Also, there is an
urgent need for better defining the problem by developing and
disseminating statistics detailing the economic status of the
various ethnic groups in the region.


2. (C) The U.S. could make a modest but useful and welcome
contribution to solving Thailand's southern problem by
looking for ways to share our extensive expertise on the
design and implementation of SEZs (Empowerment Zones),as
well as development of necessary statistical data, with Thai
Government officials. End Summary.


3. (C) Since the beginning of the latest round of violence
in July 2004 in the nation's three Southernmost provinces,
over 1,800 people have lost their lives. Notwithstanding the
new military-appointed Thai central government's adoption in
September 2006 of a new, more conciliatory policy toward the
Southern Muslim population, violence has intensified.
Assassinations, bombings, burning of schools, and other acts
of mayhem have continued on a daily basis. Based on our
observations during a recent visit to the region, we can
attest to a palpable climate of fear pervading the region.


4. (C) Most knowledgeable observers trace the roots of the
conflict to the early 20th century border delineation
negotiated between the British colonial rulers of Malaya and
the Kingdom of Siam that placed the territory of the old
Pattani Sultanate within Thailand. (NOTE: Some commentators
date the conflict to the 17th century, when war broke out
over the refusal of the Pattani queen to pay the annual
tribute to the Thai king during the reign of the Thai Kingdom
of Ayutthaya.) Populated overwhelmingly by ethnic Malay
adherents to the Muslim faith, the three provinces of
Pattani, Songkhla, and Narathiwat speak a different
(non-Thai) language, are not ethnic Siamese/Thai, and had a
history of independent rule. Even within the three
provinces, there is a fairly rigid pattern of segregation.
Ethnic Malays generally live in the rural and coastal areas,
while a disproportionate number of ethnic Thais live in the
cities. Rural villages are almost always either exclusively
Buddhist or Muslim.


5. (C) This feeling of separateness from the Buddhist Thai
nation, with the latter emphasizing the three principles of
"Nation-Religion-King" (with religion meaning Buddhism),is
viewed by most observers as the root cause of the insurgency.
The recent (2004) upsurge in violence may also be related to
the upsurge in militant Islamist beliefs in the world outside
Thailand. In Southern Thailand, the most extreme Islamism
militancy expresses itself in the drive for the expulsion of
colonialist Siamese and the restoration of the Sultanate of
Pattani.

Economic Factors Not the Basic Problem, But Could Be Part of
the Solution


6. (C) This conventional view marginalizes any economic
dimension to the Southern insurgency. In support of this
view, observers point out that the southern provinces are not
the poorest in Thailand, and unemployment is relatively low.
Tellingly, in their previous pronouncements the insurgents
themselves do not give prominence to economic factors in
their list of grievances against "Siam." During a recent
visit to the Southern provinces by Embassy economic officers,

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we found no evidence that refutes the conventional view. By
and large, the region's economic woes are an effect -- not a
cause -- of the problem. However, we also believe that while
economic factors are not the root cause of the problem, there
are important economic dimensions to the Southern crisis
that, if effectively addressed, could make a contribution to
the solution.

A World Apart


7. (C) Viewed from the available statistics, Thailand's
Southern three provinces are a world apart from Thailand.
The population of the area totals about 1.6 million out of a
total population of about 63 million. While Thailand as a
whole is mainly populated by ethnic Thais, ethnic Malays
account for 70-80 percent of the population in the South.
The first language for the majority of Thais is Thai, whereas
the local Malayu language is the principal spoken language in
the south. Estimates vary, but a substantial minority of
Southerners do not have a working knowledge of Thai. (NOTE:
This statistic is testament to a lack of uniform
effectiveness of the Thai educational system in the region:
by law, all Thais must attend Thai schools through grade 6.
That many southerners do not speak Thai suggests that this
legal requirement has not been completely fulfilled
throughout the southern provinces. The situation does,
however, seem to be improving: most non-Thai speakers are
thought to be older.) Consistent with trends seen in other
developing economies, Thailand's birthrate has steadily
declined throughout the 1980's and 1990's to slightly under
two children per child-bearing age female, i.e., slightly
below the replacement rate. This trend has not been seen in
the South, however, where birth rates remain very high,
currently about three times higher than the national average.
(NOTE: Part of this wide difference is due to the fact
that, in line with Islamic custom, polygamy is a common
practice among ethnic Malays in the Southern provinces.)

Official Statistics Paint an Overly Positive Picture


8. (C) Inadequate statistical information obscures the
pronounced economic fault lines within southern society,
fault lines which closely correlate with ethnicity.
According to available RTG statistics, household income for
the Southern regions is modestly lower -- about 15 percent --
than the whole of Thailand. Gross Regional Product per
capita for the South is about 25 percent lower than
Thailand's GDP per capita. However, the "poverty incidence"
(an RTG indicator that measures the percentage of the
population living below a set "poverty line" income figure)
is appreciably lower for the South than for Thailand as a
whole (about 11 percent versus 15 percent). Unemployment in
the South, while somewhat higher than Thailand as a whole, is
a seemingly low 3 percent. Judging from the official
statistics, then, the situation in the South is not
particularly bad, comparing favorably with, for example,
northeast Thailand.


9. (C) However, these statistics provides a generally
misleading picture. They do not capture the very negative
economic dynamics that have been at work in the South since

1960. If we look at household income in 1960, if all of
Thailand is indexed at 100, the Southern region was 120.7,
that is, had a household income 20.7 percent higher than
Thailand as a whole. In 2000, the index number for the South
had fallen to 91.8. A similar picture can be seen for GDP
per capita: in 1960, the South's index number was 126.2
(compared to all-of-Thailand's 100); by 2000, the South had
fallen to 68.7. Starting in 1960 from a position of relative
prosperity, the South has fallen behind. There is every
reason to believe that since 2000 the South has continued to
fall farther and farther behind the national average. This
negative trend has occurred even as the South's absolute
income levels have increased; it is the region's relative
performance vis--vis Thailand as a whole that is falling
behind.


10. (C) While the Southern provinces are a world apart from
Thailand, within the far South there is an equally severe
separation between ethnic Malays and ethnic Thais. The RTG
generally does not break down unemployment rates for age,
ethnicity, or gender. For the South at least, this lack of
statistical disaggregation severely limits the usefulness of
the available data. By all accounts, the Southern provinces

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are highly segregated, living on opposite sides of a wall
composed of differing cultures, history, language, and
religion. Buddhist Thais and Thai-Chinese are mostly
concentrated in urban areas, engaged as government workers
and merchants. Ethnic Malays are mostly engaged in rural
agricultural work (rubber production, small-scale farming,
fishing, and canneries). Female Muslims are extensively
employed in the region's canneries. For male Muslims,
however, knowledgeable local observers estimate the
unemployment or severe underemployment rate at 40 percent,
increasing to as much as 60 percent for youth. (NOTE: The
severity of these reported unemployment figures is apparent
when definitions are considered: the RTG defines a person as
employed if he/she works for pay as little as three hours per
week.). Reasons cited for the high unemployment rate among
ethnic Malay youth include a lack of tradition of employment
outside the home; a weak family structure that, among other
things, fails to instill a strong work ethic in youth; lack
of work qualifications, mostly due to inadequate education;
and discrimination by mostly Buddhist Thai employers.
Whatever the reason(s),everyone agrees that there exists
severe unemployment among male ethnic Malay youth. The
significance of this lies in the fact that most of the
violence is being perpetrated by male ethnic Malay youth.

Slow Motion Economic Collapse


11. (C) The economy of the South centers on rubber
cultivation, coconuts, fishing/aquaculture and processing,
tourism, wood, and small scale farming. In the cities and
along the border, merchants (many of them ethnic Chinese)
traditionally have done a brisk business selling various
consumer products at discount rates made possible by a
thriving smuggling trade with Malaysia. Due in part to the
smuggling trade, the South has always had a reputation among
Thais as a lawless, swashbuckling place with more than its
fair share of gangster types (operating in collusion with
corrupt officials appointed by Bangkok). By and large,
however, the gangsters didn't present a threat to the
region's basic industries.


12. (C) With the ongoing -- and intensifying -- insurgency,
everything has changed. Virtually all components of the
region's economy have been severely affected. The almost
daily bombings have caused the once thriving tourism industry
to collapse. In Pattani, once a major tourism destination
for visitors from Malaysia, hotel owners report that there
are no longer any traditional tourists; business nowadays
consists mostly of Thai Government officials and security
services personnel. A similar situation can be seen in Hat
Yai, which is Thailand's largest Southern city. Although not
within the three Southern provinces, it is close by and is
used as a gateway to the far South. Hat Yai used to enjoy a
booming tourist industry. Malaysians would arrive in charter
buses. The city also was a popular destination for
Singaporeans. Many Thais from the north also visited,
usually on shopping expeditions motivated by the availability
of cheap electronics and other goods. Hat Yai suffered a
number of fatal bomb attacks starting in 2004. In 2003, Hay
Yai hotels enjoyed occupancy rates of about 80 percent. In
2005, after a fatal bombing at the city's airport, this fell
to 40 percent. For 2006, after further bomb attacks,
including the coordinated attacks of September 11 that killed
an AmCit tourist, occupancy rates have been around 20 percent.


13. (C) A casual examination of RTG statistics suggests
that the region's rubber industry is doing fairly well: for
2006, overall production volume is about the same as it was
in 2004 (although it has declined by about 10 percent in the
southernmost province of Narathiwat). However, rubber prices
have more than doubled over the past two years.
Historically, such price surges have provoked greatly
increased rubber production in the South. That this has not
occurred in the current commodity price cycle is due to the
ongoing violence. Rubber cultivation has been affected by a
lack of workers, and intimidation of the dwindling number of
workers still available. There is also a lack of investment
necessary to improve the infrastructure that supports the
rubber industry. The region used to attract workers from the
north of Thailand, but these have departed for two reasons.
First, employment opportunities for rubber workers now exist
in northern Thailand (many rubber trees have been planted
there in recent years),plus the violence in the South serves
as a deterrent. The nature of rubber harvesting makes it an

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especially dangerous occupation under the current conditions
in the South: normally, rubber trees are tapped at around
1:00 am, with the worker returning in the morning to collect
the latex. Given the level of violence, the prospect of
walking around in the woods in the middle of the night in the
South is viewed as daunting if not suicidal; several rubber
tappers have been killed in the early morning hours.


14. (C) Fish and wood processing plants have also been
affected. Many of the fish processing plants, or canneries,
serve overseas markets. This usually entails expatriate
quality control inspectors on-site. The escalating violence
has made this problematic. Most Japanese importers have
declared Thailand's Southern provinces off limits to their
quality control personnel. This means that these plants
cannot export to Japan. Due to these kinds of problems,
several canneries have either been forced to lay off many
workers, or close completely. Sometimes a work-around
solution can be found. A para wood furniture maker selling
to the U.S.'s Wal-Mart told us that Wal-Mart would no longer
allow their employees to visit the furniture plant for
necessary quality control and other certification. In this
case, however, the Thai firm arranged to ship the furniture
to its sister firm in northern Thailand, where it could be
inspected by Wal-Mart personnel. But even in this "happy
ending" case, there are additional costs that reduce the
commercial viability of the Southern Thailand factory.

A Declining Population


15. (C) The ongoing violence and declining economy have led
to an out-migration from the affected provinces and
neighboring areas. Again, statistics are scarce since most
people who leave do not formally change their residence
registration, but simply take up residence farther north. We
have also heard anecdotal evidence that the RTG is
deliberately not registering Buddhists who move from the
South in order to conceal the large number leaving the
region. Ethnic Thai Buddhists and university students
comprise the majority of out-migrants (although there have
been reports of relatively small numbers of ethnic Malays
seeking refuge in Malaysia in response to alleged Thai
military/police harassment). Based on interviews with
municipal officials, we estimate that tens of thousands of
people have fled the South and have taken up more or less
permanent residence elsewhere. Various measures support
this: the mayors of the municipalities of Yala and Pattani
told us that the volume of garbage collected by the municipal
services in those cities has declined by 50 percent over the
past two years. Real estate values have plummeted in the
three provinces, reflecting a lack of buyers and a surplus of
sellers, while they have increased in neighboring Songkhla
Province which is seen as safer. Much of the massive drop in
population that could be inferred from garbage collection
statistics is probably more accurately attributable to the
near total collapse of the tourism industries in those
cities. But it is obvious from our numerous interviews that
the resident populations of the urban centers have been
measurably reduced in recent years; fearing for their safety,
many ethnic Thais have chosen to live outside the region,
making day trips to the area to attend to their businesses.
Ordinary people receive daily reminders of the seemingly
omnipresent dangers: during our meeting with the Mayor of
Yala and prominent business leaders and academics, eight
separate bombs went off in downtown car dealerships
(including one located next to the meeting venue),critically
injuring several people. Our interview with the head of the
Pattani Chamber of Commerce had to be hastily rescheduled
because he was leaving the city: Muslim friends had tipped
him off that he was targeted for assassination the following
week. Naturally, in this climate of intimidation investor
confidence is very low. The flight of so many people, the
majority of whom are higher income ethnic Thais, is both a
cause and effect of the slow motion collapse of the region's
economy.


16. (C) While no one thinks that economic factors are the
root cause of the Southern insurgency, the gradual collapse
of the region's economy is serving to exacerbate an already
bad situation. Given that greater economic opportunity for
the region's ethnic Malay population figures in the RTG's
plans for pacifying the South, the fact that economic trends
are headed in the opposite direction has the potential to
derail the RTG's overall strategy.

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Stabilizing the Patient


17. (C) With the current level of violence, the idea
advocated by some -- massive economic development in the
South -- is unrealistic, in our view. The level of security
for both life and property that currently can be provided is
completely inadequate for any investor using conventional
risk assessment methodologies. The South has significant
economic potential (particularly, we believe, in tourism),
but development awaits an improved security situation.


18. (C) What is going on currently in the South is much
worse than lack of "new" economic development -- the existing
economy is collapsing under the weight of daily
assassinations and attacks on property. What is needed --
and, we think, could be possible with the right policies --
is to take effective steps to preserve the existing
investment in the region. This "stabilizing the patient"
approach would aim to prevent the economic situation from
worsening, buying time for the RTG to implement effective
policies aimed at eventually reducing the level of violence
and creating conditions for sustained economic development.

The Southern Special Economic Zone (SEZ): A Step in the Right
Direction


19. (C) A proposal made over a year ago and recently
approved by the interim government is the creation of a
Special Economic Zone (SEZ) encompassing the three Southern
provinces, as well as some neighboring areas affected by the
violence. Existing and new investors within the SEZ are
qualified to receive very low tax rates on their investments.
That should increase profit margins, keeping some otherwise
failing businesses afloat. Another potentially useful step
taken by the RTG is the extension for an additional year of
an existing Bank of Thailand-financed soft loan program. In
our tour of the region, we met several business owners who
credit this program with enabling them to stave off
bankruptcy.


20. (C) Thai efforts to integrate the three Southern
provinces into Thailand's dominant culture probably has
blinded policymakers to potential economic development
opportunities unique to the region. Examples include the
development of a halal food export industry (an idea which
has been promoted by some thoughtful RTG officials),and the
development of Islamic medical tourism. Also, the area is
possessed of considerable natural beauty, including
spectacular beaches. The region could be developed for
tourism, perhaps with marketing that targets Islamic
countries.


21. (C) It remains to be seen how much of a stabilizing
impact the RTG's cheap credit measures will have. The RTG is
aiming at a moving target: these incentives are designed to
countervail the enormous disincentives to investment that
currently exist. However, there is a general perception that
the disincentives are growing (violence levels are on the
rise),so the RTG may have to provide even more incentives to
woo investors away from a cut-and-run strategy. We were told
that conventional plant insurance rates for facilities
located in the south have quadrupled since 2002. Southern
officials have asked the RTG for some form of relief on this
(perhaps in the form of a partial state-provided rebate on
insurance premiums),so far to no avail. Our impression is
that the RTG is just beginning to come to grips with the
budgetary implications of a comprehensive strategy for the
Southern problem. Effective measures are likely to be
expensive and necessary for many years.


22. (C) Even if the Southern economy begins to create
employment opportunities, it is an open question whether
young ethnic Malays will be hired. If the status quo
endures, any new jobs would likely be filled by ethnic Thais
from the northeast; male ethnic Malay youth would be
sidelined as they have always been, for all the reasons
listed in para 10. Recognition of this reality is what
motivated the RTG-funded National Economic and Social
Development Board (NESDB) to abruptly shift its policy
prescriptions for the south. In 2004, the NESDB advocated
economic development as the cure for the South's ills. In
2006, the NESDB altered its policy prescription, placing
greater emphasis on improving qualifications for the region's

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youth through improvements in the educational system. There
is universal agreement that something will have to be done to
improve ethnic Malays' job qualifications and/or create
additional employer incentives for hiring.

Better Metrics, Please


23. (C) We've noted that most knowledgeable observers
identify the separateness (language, education, history,
religion, economic status) of Thailand's Southern Muslim
population as the root cause of the problem. Unfortunately,
much of what we know about that separateness is anecdotal.
While no one in the region doubts that Southern Muslims earn
much less than Southern Buddhists, there are no statistics
that document this. Everyone we spoke with in the South
readily conceded that the unemployment rate among Muslims
(especially males) is much higher than other ethnic groups,
but statistical information on this point does not exist.
Some have suggested that the lack of data reflects political
sensitivities among Thai rulers about anything documenting a
lack of unity among the Thai people. In any case, since
policymakers don't have a measure of the problem, it is
hardly surprising that a solution has eluded them. The
situation is somewhat analogous to the U.S.'s long struggle
to address racial inequality in American society: imagine how
much more difficult the task would be if the U.S. Government
did not develop comparative data on white versus black
incomes, employment, etc. It is axiomatic that a
prerequisite of an effective policy solution is a reasonably
complete understanding of the problem. We regard the
development and dissemination of a comprehensive statistical
database that measures the current situation in the South as
an urgent priority.

What We Can Do


24. (C) What can the U.S. do to help our friend and ally?
The honest answer is, not much. Any overt, direct U.S.
involvement would be viewed with suspicion and could easily
make things worse. (Even now, conspiracy theories abound:
during our recent visit to the region, we had to cancel one
planned meeting with community leaders in Narathiwat due to
concerns by some of the participants that our presence in the
area would be maliciously interpreted by some.) This is a
Thai problem that requires a Thai solution.


25. (C) We may, however, have expertise that we could share
with Thais. The RTG is on the right track in throwing a
lifeline to existing investment in the south through the SEZ
concept. SEZs are an American invention (currently we call
them Empowerment Zones in the U.S.). While the U.S. is not
facing separatist violence, U.S. SEZs face the same basic
challenge as the southern SEZ in Thailand: how to attract
investment and jobs to an area that has significant
disincentives to both. U.S. Federal and local governments
have almost 40 years of experience in designing and
implementing SEZs in both urban and rural areas in the U.S.
While they have their critics ("they don't create wealth,
they just shift it around"),SEZs in the U.S. have a fairly
good record in fostering economic development in targeted
areas. Most of the urban SEZs are administered by the U.S.
Department of Housing and Urban Development, while most of
the rural SEZs are administered by the U.S. Department of
Agriculture. We can use the State Department's IV program
and other agencies' similar exchange programs to share the
expertise of these U.S agencies with Thai officials in
designing and implementing SEZs. We should look for
opportunities to have appropriate Thai officials visit U.S.
SEZs to learn from their experiences on the effectiveness of
various measures. Also, we may be able to assist the RTG in
creating more useful economic data for the South. Such
actions on our part would be non-controversial and welcome by
Thais, and could play a modest but useful role in easing the
crisis in southern Thailand.
ARVIZU