Where does all this money come from?

25 February 1997

Where does all this money come from? Thirty billion baht spent on the last election (more than on the US presidential campaign). Nine-figure sums reportedly spent to secure plum posts in the police. Thousand-table Chinese dinners hosted by big political figures. Public officials who drive luxury cars which cost more than their lifetime salary. Where oh where does all this money come from?

Some of the answer can be found in the Chulalongkorn University research on Thailand’s illegal economy. The researchers estimated that the value-added (read: profit+wages) from six illegal businesses amounts to some 400 thousand million baht, equivalent to 10 percent of the national economy. The big earners are drugs, prostitution and three types of gambling (underground lotteries, football pools, and casinos). More modest amounts are made from trading arms, trafficking in people, and smuggling oil. The research did not cover all types of illegal business. Adding in other forms of smuggling and gambling, illegal logging, stock manipulation and other economic crimes would certainly boost the figure.

Is this big? For comparison, the infamous cocaine trade is reckoned to be 3-6 percent of the Colombian economy. In several western countries, the illegal economy is reckoned to be around 15 to 30 percent of the size of the legitimate economy. But these calculations also include tax-evasion, corruption, and the informal economy. Including these items in the Thai estimate would swell the figures a lot.

By declaring businesses illegal but then failing to suppress them effectively, the government ensures that they deliver high profits. The illegal tag enables the business owners to charge premium prices. It also restricts entry to the business and keeps the profits concentrated in a few hands. Illegal businesses create rich bosses.

The Chula research shows that these various businesses are closely linked. There are bosses, syndicates, financiers and protection rackets which span across the range of illegal commerce. This is not small-scale malfeasance. This is organised crime. Moreover, these networks do not stop at the national boundaries. The financial networks behind certain kinds of gambling flow across into Malaysia and Indonesia. The gangs involved in the flesh trade are linked with counterparts in Japan, Singapore, Taiwan and Hong Kong. The drug channels stretch back into Burma and onwards to the US and Europe.

In fact, Thailand is becoming something of a regional or international centre for certain forms of illegal business. International networks take advantage of Thailand’s rather lax law-enforcement to base some of their operations here. For a long time, Thailand was a clearing point in the drug trade, though this has diminished recently with competition from China. In the flesh trade, Thailand’s role seems to be on the increase. Thailand is a staging point for the international trade in prostitutes and illegal workers, with facilities for production of false travel documents and processing of foreign nationals to third countries.

Does all this matter? You can argue that these flourishing businesses contribute to overall economic growth. They also generate employment. Prostitution in particular employs around 300,000 directly and many more indirectly in related entertainment ventures. The underground lottery possibly employs 4 million people on a part-time basis (2-6 days a month). These illegal businesses probably contribute positively to the trade accounts. And so far the violence which usually goes along with criminal businesses is mostly internal: bad guys tend to shoot one another.

But in other ways, the effects are negative and they impact on all of us. The government loses a lot of tax income. Oil-smuggling alone, one of the smallest items in the Chula research, costs the government 10 billion baht a year in lost revenues. The economy is distorted by the flow of illegal profits. Businessmen resent having to compete against people who seem to have vast and cheap capital resources. The disastrous bubbles in the stock and property markets were in part created by inflows of illegal money which used these markets for laundering.

The most damaging result of hosting such a large illegal economy is possibly not economic at all. Rather it lies in the corrosive influence on all of the institutions for making and enforcing the law - most importantly the police, but also the military, the judiciary, and the parliament.

It is widely accepted that illegal businesses exist under the patronage of the police, and that this patronage comes at a price. The Chula research team interviewed both illegal business-owners and policemen (sometimes together), and both sides agreed that payments to the police were systematic and large.

Just how many police officers are involved is less clear and more controversial. According to some accounts, the revenue from all kinds of informal fees levied by the police is amalgamated and redistributed widely within the force. But according to one policeman speaking at a seminar on the Chula research, only two percent of policemen are involved. That would mean around 4,000 officers. If we make the conservative assumption that one percent of the Chula estimate goes towards police pay-offs, that would give these officers on average an extra income of a million baht a year.

But there is also evidence that some police are more than passive patrons of illegal businesses. One reason why the amphetamine trade has expanded so rapidly in recent years, and is proving so difficult to control, may be the level of police involvement. The Minister of Interior recently confirmed that some senior officers are involved, and asked them to stop. A police officer in Chiang Rai has been suspended on suspicion of involvement in a drug manufacturing plant across the border in Laos. A senior policeman told Chang Noi that half of all those involved in the trade are policemen. That may or may not be true. But if it is, then much of the recent ‘mad drug’ campaign may be about sharing the profits, not suppressing the trade.

Extracting protection fees also breeds bad habits. Some police extend the practice to legal businesses. Last week Chang Noi heard of a small business-owner who was forced to close down because of police demands for protection fees. Not large amounts, but regular, every month. Not just one demand. Three separate police units each demanded a fee. Well-known "straight" policemen like Seri Temiyavej now have groups of public supporters, mostly small and medium businessmen who need protection against protection rackets.

Military figures are also involved in these illegal businesses. Some of the protection rackets which prey on gambling and prostitution businesses are said to be based in the army. Political figures are also involved. In the last parliament, 20-30 MPs were said to be involved in illegal businesses. At the elections, underground lottery owners and other local bosses openly played a role in organising campaigns.

Thailand is not unique in hosting such a large illegal economy. In other countries in the region, it may be even larger but we just don’t know. Where Thailand is currently unique is in having a study of it. In many ways the study has no news. It has not been a secret that drugs, prostitution, gambling and other illegal businesses are widespread. But the existence of the study presents a challenge: what ought we to do about the illegal economy?

The Chula report argues that some illegal activities (drugs, arms, smuggling) need to be suppressed more effectively, while others which are less damaging (gambling, prostitution) may need to be legalised. Legalisation would reduce the involvement of criminal networks, and would reduce the corrosive impact on the police. It would also open up the possibility for better controls, and possibly even new sources of government revenue.

But neither suppression nor legalisation will work as long as the police is so heavily involved. The major contribution of the Chula research is not the estimate of the illegal economy’s size, but the highlighting of the importance of reforming the police.