While the world watches Egypt, Thailand and Cambodia are almost at war

Feb 10, 2011
By Cris Sholto Heaton
MoneyWeek

Imagine that two European countries – say, Italy and Slovenia – were lobbing artillery shells at each other in a dispute over a church on their shared border.

It doesn't sound very likely. But that's more or less what's going on in Southeast Asia right now.

Relations between Cambodia and Thailand have taken a nasty turn in the last few weeks. An ongoing row about a 900-year old temple called Preah Vihear has spilled over into violence yet again. Several soldiers and civilians have been killed in exchanges of fire over the past couple of weeks.

Events in Egypt have mostly kept this spat out of the headlines in the West. But it's an unpleasant mess. And it tarnishes the reputation of both the countries involved, and their neighbours.

With governance something that matters more for sentiment in emerging markets than it might elsewhere, investors should keep an eye on the situation…

A good excuse for causing trouble

Thailand and Cambodia have been in dispute over ownership of Preah Vihear since the current border was established a century ago.

In 1962, Cambodia won an international court ruling that the temple was its territory. This should have settled things. The Thai troops that had occupied it withdrew after the decision.

Unfortunately, the order said nothing about the land surrounding the temple. That's still contested. And when Cambodia successfully applied to have the temple listed as a world heritage site by UNESCO in 2008, it included some of this land in its proposal. That made the temple a hot issue again, as it was dragged into Thailand's messy politics.

The People's Alliance for Democracy (PAD), or 'yellowshirt' movement, opposes former prime minister Thaksin Shinawatra (now in exile). They've used the temple as a key rallying point. They claimed that the then-government's willingness to support Cambodia's application for world heritage status was giving away Thai territory.

PAD's protests and some helpful court decisions turfed that government out of power. It was replaced by the current administration headed by Abhisit Vejjajiva, and the issue cooled off a little. There were a couple of encounters, but the situation appeared to be settling down.

But things took a major turn for the worse in late 2010. In December, Cambodian border guards arrested seven Thais for illegally crossing the border. Although this was in another location, it immediately brought all border issues back into the headlines. The party included a PAD activist and his aide, who are still being detained in Cambodia (as well as an MP from the ruling party, who has now been released).

Unfortunately, at the time, relations between the PAD and Abhisit had soured. The yellowshirts were agitating for another change of government. And the arrests gave them an excellent excuse to get back on the streets, demanding that Abhisit take a tougher line or resign. Add in the fact that many in the military are in the same anti-Thaksin camp as the PAD, and it's no surprise that things have again boiled over on the frontlines.

This might make it sound as though all the sabre-rattling is on the Thai side. It's not. Cambodia's autocratic prime minister Hun Sen frequently uses the temple issue for domestic political purposes too. He recently stationed his son (who he presumably intends to succeed him) with the forces at Preah Vihear to boost his profile.

For historical reasons, there is a fair amount of anti-Thai sentiment in Cambodia at the best of times. There were anti-Thai riots in Phnom Penh in 2003 when a Thai actress was misquoted as saying that the Angkor Wat temple (unambiguously Cambodian) belonged to Thailand.

Finally, you need to remember that Thaksin and Hun Sen are friends. The former Thai PM acts as an adviser to Cambodia. Like everything he does, this is calculated to stir the pot in Bangkok.

Put all this together, and you have a recipe for a very messy dispute. One that unfortunately involves soldiers and civilians dying over a tiny piece of borderland.

An embarrassment for Southeast Asia

Beyond the deaths, why does this spat matter? Well, the worst case scenario is that it could escalate into something much worse. Thailand has a larger army than Cambodia, including a far more powerful airforce. But Cambodian troops would not be a pushover. Casualties would probably be high on both sides.

For now, war looks unlikely. There doesn't seem to be much appetite for bloodshed in Bangkok beyond the vocal minority of the PAD. But even if it doesn't spiral, the affair is already making these two countries – and Southeast Asia by extension – look pretty bad.

To get the best deal for themselves in the decades ahead, Southeast Asian countries need to work together much more than they have done in the past, along the lines of a mini-European Union. Nobody's expecting a full EU-scale project – there's too much concern about national sovereignty for that. But the Association of Southeast Asian Nations (ASEAN) is finally showing signs of going beyond being a simple talking shop.

We have seen progress on deals to reduce barriers to trade and investment in the region, and promote free-trade deals with the rest of the world. Members with tricky political histories such as Malaysia and Singapore have made some moves towards improving relations.

There are many areas where ASEAN can benefit from teaming up. For example, a longstanding plan for an electronic link between stockmarkets in Singapore with Malaysia, Thailand and the Philippines will hopefully be in place by the end of the year. This could cut trading costs, improve liquidity and make ASEAN's relatively small capital markets largely and more attractive

But conflicts such as this one between ASEAN members have quite the opposite effect. So Cambodia and Thailand aren't just hurting each other. They're also damaging their neighbours. So the whole of Southeast Asia should be – and is – pushing for this to be resolved.

Thai politics are at the heart of this mess

The other reason to worry is that it's yet another sign of how corrosive Thai politics is. The affair is by no means solely the fault of the Thai government. And it's unclear who fired first in this particular round.

But the ongoing power struggle in Thailand is a major reason why the conflict has flared up again. The PAD's nationalist rhetoric will do nothing to help bring a peaceful solution. It makes even sensible politicians worry about looking too soft.

It also reinforces the problems within Thailand. Any PAD demonstrations bring a response from the pro-Thaksin 'redshirts'. The sight of these competing groups of demonstrators on the streets shows how polarised Thailand still is.

Politics remains Thailand's main problem. The country has huge potential. Stocks are relatively cheap compared to peers, especially in the smaller end of the market. Dividend yields higher than government bond yields are not uncommon. From a bottom-up value perspective, it looks highly compelling.

But the divide between the established Bangkok elite and the poorer rural majority (which is loosely how the yellowshirt versus redshirt movement breaks down) is wide. And there seems little understanding of how to narrow it.

Thailand's near-universal reverence for King Bhumibol has helped hold the country together during past problems. But the king is in poor health. His death could come at any moment. His son is viewed as a playboy, and is widely disliked and probably incapable of uniting the country in the same way as his father. Unless reconciliation becomes more important, Thailand could be headed for severe unrest.

Of course, there is always the chance that politics could take a turn for the better. A peaceful solution to the Preah Vihear problem in the face of the PAD's rantings could be a positive if it left them looking hot-headed and marginalised.

Meanwhile, elections are likely in the next few months, as long as the PAD and the army don't manage to whip up enough unrest over Preah Vihear to have them postponed. Abhisit has made some efforts to reach out to the rural population that has been Thaksin's powerbase. If some of these voters are won over and the government wins a convincing victory, it could be a major step towards patching up problems and reducing Thaksin's influence.

But it would certainly be far easier to be optimistic about Thailand if we didn't have to cope with situations like this.