What’s next for the Thai economy?

Thailand Outlook

My article in LiveMint.com, online newspaper in India. First published 17 Dec 2017.

The year 2017 has been a crucial one for Thailand. The funeral of King Bhumibol Adulyadej in October was the symbolic beginning of a new era in every aspect: political, economic and social. King Bhumibol was the world’s longest-reigning monarch in modern history. His rule lasted more than 70 years (1946-2016). In fact, all the modernization periods of Thailand after World War II were under his reign.

In those 70 years, Thailand transitioned from a pre-industrial economy to an Asian economic miracle. It passed through the Great Pacific War, the Vietnam War, communism in Indochina, and the 1997 Asian financial crisis.

In terms of economic development, Thailand went through two distinct phases. The first was as an American ally in the Cold War, during which Thailand had ample financial support. It developed its infrastructure and many state-owned enterprises to create domestic industries. The second phase was triggered by the Plaza Accord of 1985 which forced Japanese companies to move manufacturing plants out of Japan. Thailand became a major destination owing to various factors, including friendly Japanese-Thai people relations from the war period. Thailand’s industrialization in this phase was the main driver of the country’s economic growth in the last few decades. Today, Thailand is one of the leading economies in South-East Asia. Its strength is in both, the export-led industrial sector and the tourism-led services sector.

As Thailand enters a new era, however, one crucial question still remains unanswered: Where should the Thai economy head next?

After a long period of growth (except around the financial crisis), the Thai economy is showing its age. It is now the slowest growing country in South-East Asia. International Monetary Fund (IMF) figures as of 2017 forecast Thailand’s per capita gross domestic product (GDP) growth at 3.7%, slower than Philippines (6.6%), Vietnam (6.3%), Cambodia (6.9%), Indonesia (5.2%), Malaysia (5.4%) and Myanmar (7.2%). Only Singapore is growing slower (2.5%) but it is already a much more developed economy.

Thailand’s main problem comes from the manufacturing sector. The advantage of low labour wages is gone. Businesses are moving factories to other South-East Asian countries with lower labour wages. Export-led manufacturing has also been affected by slow global growth. The agriculture sector is also not yielding any dividend. Most Thai agricultural produce is highly price sensitive. Agricultural productivity (output per area) is also comparatively lower than peer countries. The Thai economy is now driven by the services sector, led by a tourism boom (in 2016, inbound tourists were 32.6 million, ninth highest in the world).

Almost everyone in Thailand is aware of all this but no one knows how to fix it. The current Prayuth Chan-ocha government has proposed a vision of “Thailand 4.0” as the new economic model to escape a middle-income trap. Officially, Thailand is currently labelled 1.0 for agriculture, 2.0 for light industry, 3.0 for advanced industry and 4.0 for an innovation-led economy.

The most concrete plan is the extension of an old industrial zone in the eastern part of the country. The eastern economic zone was a success story in the Japanese investment era, driven by oil and gas, electronics and automobiles. The proposed Eastern Economic Corridor (EEC), with 13,000 sq. km land, will offer tax incentives for investment in 10 new ‘engine-of-growth’ industries, including the robotics, aviation, biofuel, digital and medical industries.

The Thai government is also pushing the role of start-ups. Various government agencies are funding new start-ups via incubator programmes. These initiatives are still in the initial stages and there have been no solid outputs yet. One has only seen several fruitless ‘start-up expo’ events from the state budget.

“Thailand 4.0” is looking good as a concept but its feasibility is questionable. Becoming a high-tech economy is definitely a virtuous aspiration but can Thailand achieve that dream? One of its biggest weaknesses is the lack of human resources in the STEM (science, technology, engineering, mathematics) fields. Thai workers are famous for their skills in manufacturing electronics and automobiles. But in an age of software, data and Artificial Intelligence, their old skills will be obsolete—modern tech skills cannot be easily developed.

Thailand should do a rethink and find its real strength. Going through industrialization 4.0 might not be the best way since the country’s roots lie in agriculture. Thailand’s geographic location and tropical climate are quite suitable for agriculture. An effort should be made to shift from low-value produce to high-value agriculture products such as organic fruits.

Thailand’s services sector is already world famous—the country is well known for “fun and pleasure”. This strength should extend to new tourist destinations outside Bangkok, Phuket, Pattaya and Chiang Mai. Eliminating tourism frauds and scams will be important to sustain the tourism industry.

Thailand’s target customers are also shifting. In the past, most Thai exported goods went to Europe and the US. After the 2008 financial crisis, local trade within Asia has increased rapidly. Thailand should target the “new middle-class” demography from emerging Asian countries such as China, India, Indonesia and Vietnam. Better connectivity with these countries should help in accelerating our trade relations. China’s “One Belt One Road” and India’s “Look/Act East Policy” should be its top priority.

To sum up, 2018 will be an important year for Thailand under the new king, Maha Vajiralongkorn. The last few years have shown that the old strategies are not working. Thailand is now desperately in need of fresh ideas.