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Coping with the Fourth Industrial Revolution: Thailand’s Economic Growth Imperatives

 Video:

Part 1 : https://youtu.be/7Gabe7grazc

 

Part 2 : https://youtu.be/tnJXFedDLlU

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                            Program

 

        Opening Remarks

 

         Assoc. Prof. Dr. Ake Tangsupvattana

         Dean, Faculty of Political Science, Chulalongkorn University

 

        Speakers:

         Dr. Sutapa Amornvivat

         Chief Economist and First Executive Vice President

         Siam Commercial Bank (SCB)

         Dr. Kirida Bhaopichitr

         Research Director for International Research and Advisory Service,

         Thailand Development Research Institute (TDRI)

         Assoc. Prof. Dr. Pavida Pananond

         Associate Professor of International Business,

         Thammasat Business School, Thammasat University.

         Mr. Prinn Panitchpakdi

         Managing Director, CLSA Securities (Thailand) Limited

 

        Moderator: 

         Assoc. Prof. Dr. Thitinan Pongsudhirak

         Director of ISIS Thailand

         Faculty of Political Science, Chulalongkorn University

Assoc. Prof. Dr. Ake Tangsupvattana

Dean, Faculty of Political Science, Chulalongkorn University

 

We have heard so much about “Thailand 4.0” without knowing what “Thailand 4.0” is or what it means. Several years ago, the fad at the time was the “AEC,” which was only just one component of a broader Asean Community.  There were all kinds of seminars and workshops, and talks and lectures, about the AEC. The AEC has come and gone and now no one seems as interested in it. Do we have an AEC? How do we know what kind of AEC we have? Does it mean some kind of economic integration? Has the AEC fulfilled its objectives of reducing income disparity, realizing a regional production base, and integrating Asean with the world economy?  These are questions not many people around here seem to want focus on anymore.

We don’t want “Thailand 4.0” to go down the same road of being something fashionable for a while and then is not heard of much anymore.  We do know that Thailand 4.0 is the Thai government’s economic growth strategy. It is designed to usher the Thai economy into the 21st century global digitization era by managing and capitalizing on the challenges and imperatives of the 4th Industrial Revolution. Yet beyond public announcements and pronouncements, along with government-sponsored campaigns, Thailand 4.0 is not sufficiently understood.

Stuck in the so-called Middle Income Trap, the Thai economy certainly needs to find ways forward in economic upgrading, education and bureaucratic reforms and restructuring. But how to proceed and how to sustain upgrading efforts will be a paramount challenge beyond the incumbent government. Part of our intention this morning is to sustain our focus on Thailand in the midst of the 4th Industrial Revolution.  This is not some AEC fad but Thailand’s imperative. If the Thai economy cannot cope and capitalize on how the world will change, then Thailand will simply not do well in the world.


 

Moderator: The government’s Thailand 4.0 campaign is mentioned a lot and is considered as kind of a fad. But overall, the Thai economy is in trouble; Thailand no longer has a growth narrative behind it. If we look at Vietnam, Indonesia and even Myanmar, investors like a story behind economies. Thailand had its heyday back in the 1980s and 1990s. Thailand’s political drama since then more-or-less squandered the boom. The Thai growth narrative of being the manufacturing hub of Southeast Asia has lost momentum and dissipated.

We are now entering the world of Artificial Intelligence, disruptive technologies, robotics that will perhaps put an end to manufacturing. This is a new era. For Thailand, manufacturing is finished. The services sector will have to be the ‘new manufacturing.’ Thailand is well behind on education and infrastructure, the basics.

 

Dr. Kirida Bhaopichitr

Research Director for International Research and Advisory Service, Thailand Development Research Institute (TDRI)

 

Thailand 4.0 is the ‘talk of the town.’ How real is it? Is it a myth or is it reality?

Thailand has been stuck in the Middle-Income Trap for the past 30 years; Thailand has been considered middle-income since the World Bank started categorising countries in 1985, and we are still far away from being considered a high-income country with a GDP per capita of USD13,000 (Thailand is currently at USD5,500).

Although Thailand has grown in the past, inequality is still very high. Comparing Thailand to other countries in the region, although it has fallen a little bit, we still have the highest income inequality in East Asia.

There is an issue of trying to grow faster, but also grow inclusively, without leaving anybody behind. The income gap is an outcome of other factors. One of those areas is education. There is so much disparity in the quality of education in the different regions across Thailand. The data show that access to education is much better in Bangkok than other parts of the country. The Human Achievement Index from the UNDP shows that the Northeast and Southern regions of Thailand have the lowest quality of education. This is where the major differences in income comes from.

We must also remember that Thailand is ageing very quickly. This is another setback. We will be old before we get rich, unlike Singapore or Japan. By 2025, just around the corner, we will be an aged society. A quarter of the population will be older than 60. That is worrisome because it implies that our future labour force will shrink. According to the World Bank, from 2010-2040, Thailand’s labour force will have fallen by 10%. In contrast, the labour forces of other countries in the region, especially the other developing countries in Southeast Asia, are still rising. This is a great challenge for Thailand to overcome; we want to grow fast and inclusively, but we will have lots of old people as share of our population.

If we were to grow fast and inclusively, we would need each person in the labour force to be more productive. Labour productivity in Thailand is quite low as compared to Singapore or Malaysia. This is why we really need to upgrade our human capital to 4.0 as well, because we can’t have a smaller labour force and low productivity as we go forward.

Outside of the economy, we have to be aware of so-called ‘disruptive technologies.’ The phrase was first coined by McKinsey in 2014, and they range from mobile internet to 3D printing, to technology for batteries and renewable technology. These technologies are already coming into Thailand, we can’t avoid it (FinTech, e-commerce, Start Ups etc.) These are mostly in the services sector, but will have an impact on other parts of the economy, especially manufacturing.

The world is also different now. We are not in a fast-growing global economy where trade growth is booming. Today, we are seeing more protectionism and more consolidation of supply chains, after the GFC, trade and GDP growth have not grown at the same rate as in the past. We cannot expect vibrant world trade growth, even as the global economy recovers. Thai exports, especially manufacturing, is not going to grow by over 10% as it did in the past. 4-5% would be ideal these days!

Looking at the structure of Thailand’s economy, improving productivity is extremely important. Around 33% of the labour force is in the agricultural sector, while it produces only 7% of GDP. That’s not a good sign. The services sector takes about 43% of the labour force and produces a little more than half of the country’s GDP. The manufacturing sector only hires about 16% of the labour force, yet it contributes about 30% of output. The sectors which are falling behind are the services and agricultural sectors; productivity needs to be boosted in these sectors, or people need to be moved to more productive sectors like manufacturing or high quality services. However, to do this requires significant improvement of human capital, which is difficult.

Services should be the next driver of Thailand, but there are still issues that impede its success. Thailand has come up with a vision, not a plan or strategy, called Thailand 4.0. It aims to move the country from being a manufacturing-driven to a services-driven economy. Basically, it is a vision to upgrade the entire country, not just the economy, but also society, human capital, businesses, government and provincial clusters. Thailand has never had this vision before, so this is a goal that we can strive to meet. The government will have to assess its success in achieving this goal in the next 4-5 years.

The country will aim to move to higher-value added output, whether that be in the services, agricultural or manufacturing industries. For example, in agriculture we could focus more on bio-energy, agro-tourism or cosmetics. In services, we could aspire towards being a medical, logistics, aviation or economic hub. For advanced technology, robotics, self-driving or electric cars and smart electronics. All of these translate into what is being promoted in the Eastern Economic Corridor. The government will provide infrastructure for the EEC in order to attract so-called “S-Curve businesses” to invest in this area, which are similar to those sought in Thailand 4.0.

Will these businesses really be drawn to Thailand in the next 4-5 years? The existing S-Curve businesses that the government wants to attract now, such as next-generation automotive, smart electronics, wellness-tourism, or bio-tech agriculture, are areas where Thailand already has a competitive advantage. Building up in these areas will not be too difficult (except for next-generation automotive, as shifting will affect the supply chain in Thailand). As for the new S-Curve industries, such as biotics, biofuels or biotics, integrated healthcare, digital business, or aviation and logistics, TDRI thinks that it will happen, but at a much smaller scale and over a longer period of time. For example, we can promote digital business, but it will likely further serve the domestic market rather than as a regional or global hub. One of the reasons for this is because of our people – where do you find enough good engineers and scientists to work in these industries? We still have question marks on whether these new S-Curve businesses can thrive, because they will require a whole new set of people and skills. 

If we were to move Thailand 4.0 forward, the most important thing is people. We will need to move to People 4.0 as well. We need to promote life-long learning, because skills need to be upgraded constantly these days for us to remain competitive. We should also open up our labour market to professionals, to try to address the shortages in skills at the moment. Another way to help us move up the value chain would be to remove excessive red tape to make it easier to do business in Thailand. For the government itself, policies need to be consistent (within and between governments), aggressive support of prices should be tampered, and education for children must be promoted.

 

Moderator: We could really alleviate the demographic strain by allowing professional migrant workers to have more rights or residency in Thailand.

 


 

Assoc. Prof. Dr. Pavida Pananond

Associate Professor of International Business,

Thammasat Business School, Thammasat University

 

We hear a lot about the Global Value Chain and the Industrial Revolution 4.0, but we don’t really know in detail what it is about. Upgrading Thailand’s industry, infrastructure and economic model is needed whether we have faith in the government’s Thailand 4.0 strategy or not.

The bottom line of Industry 4.0 is that it requires efficiency and innovation. It is not just about making a digital economy, but we have to be focussed on effectively utilising technology to address the productivity and efficiency deficits in the economy.

Thailand’s traditional growth imperatives are based on capturing low-value added activities along the Global Value Chain. This needs to be changed, 4.0 or not. We need to move further in order to upgrade the economy.

When we look at the issue of the Global Value Chain, we have to look more seriously at how Thailand should be positioning itself and upgrading its industries, businesses and overall competitiveness. How do we move that to the higher value-added activities? It’s not just about attracting newer and sexier industries like robotics or medical equipment, but we also need to look at the existing set of industries, and find ways to improve their productivity and efficiency.

The internationalisation of Thailand needs to move beyond an export-led economy. We need to be looking at other types of internationalisation, referring directly to Outward Foreign Direct Investment by Thai firms and looking at opportunities overseas.

Thailand’s institutional readiness, especially the government’s bureaucratic competency and capacity, also needs to be addressed.

When we talk about these ideas – the Fourth Industrial Revolution, Industry 4.0, Thailand 4.0 – do we really know what it involves and what the previous eras of industrialisation have looked like? Mechanical production through water and steam was the first Industrial Revolution, which was then followed by mass production in the second Industrial Revolution, then automation in the third. The fourth Industrial Revolution refers to digitisation. The new age of technology must be used to improve the productivity and efficiency of the existing system. However, the Thai government has not stressed this point enough; it has focussed much more on the new sectors and technologies. What needs to be conveyed is that value is increasingly being created and captured in the more knowledge-intensive kinds of activities.

When we talk about the Global Value Chain, we tend to just have a vague understanding of how countries and firms are connected together in industries. The most-used example is how an iPhone is produced in different parts of Asia, and sold mostly in the US or Europe, with a value which is much higher than the sum of its parts. The iPhone is also used to point out that when you look at any value chain, you would see the different activities that used to be concentrated in one location has now been disaggregated across the world. Different firms in different countries capture different parts of that value chain. What has taken place over the past two decades is that advanced firms which have knowledge in R&D or marketing normally control that part of the value chain, but outsource the most standardised part of the production, which is manufacturing. Those parts tend to be outsourced to emerging markets, often Asia, because of the relatively lower cost of production. This has been the growth imperative for many export-oriented countries in Southeast Asia, especially in the automotive, electronics and agribusiness sectors. We welcome Inward Foreign Direct Investment from firms who set up manufacturing plants in Thailand, Vietnam and Cambodia; however, at the same time, those firms maintain the marketing and distribution network in their own countries and invest in their own R&D, where most of the value is captured. Unfortunately, this model is now oversaturated. So, what should countries who have followed that export-oriented manufacturing based economy shift to? There are different kinds of upgrading; process or product upgrading. That means we need to produce better products; for example, historically we have produced rice. To upgrade it, we can produce different varieties, we can grow it organically, improve our packaging and market it better. That is product upgrading. We could also improve the productivity of the process to grow the rice (satellite technology, machinery).

The value of the product is not really in the product itself anymore. The value of the parts of the iPhone is just USD20, but it is sold for nearly USD1000. Who captures most of the value? It is Apple, captured at the upstream or downstream ends of the value chain. Firms thus should undertake ‘horizontal upgrading.’ They should try to engage more in value-added activities.

Thai OFDI has now surpassed its IFDI. This means that expanding beyond Thailand is another imperative to our economic growth.

 


 

Dr. Sutapa Amornvivat

Chief Economist and First Executive Vice President

Siam Commercial Bank (SCB)

 

Thailand 4.0 is more about finding out how creativity and technological production can lead us and tell us what to produce. This statement, however, is problematic. We really don’t know what will be end of the technology tunnel; it is creativity that shows us the right way forward, and is the real driver of innovation. By dictating the end goal, that could really derail or mislead the country’s innovation journey.

There was a recent quote by Jack Ma, who spoke about the fear of AI development and its threat to a lot of the cheap manufacturing jobs in that sector. Nowadays, the narrative associated with AI always focusses on whether the machine can beat humans, be that in a game of chess or in sports. These milestones are remarkable, but it really does not help us to see how machine and human can work together in the future – this kind of competitive narrative drives the fears that we see in the anti-establishment populism that is rising up, especially in the developed countries. In the developing world, this can culminate in anti-trade and populist movements. A lot of these are coming from this fear of being replaced by machines, fear of change and fear of the consequences of the Global Value Chain. So instead of trying to guess which industries will shape the future, we must focus on shifting people’s perceptions of what these changes really mean.

Thailand 4.0 focusses on four aspects; high value services, smart enterprises (upgrading SMEs, providing them with digital tools and connectivity to upgrade their business) smart farming, and high-skilled labour. The last two are the core of what will lead us to the new S-Curve industries.

Why do we need Thailand 4.0? The motivation is more domestic than international (ie. the world is changing, we have to catch up); Thailand needs 4.0 to overcome the Middle-Income Trap. In the years leading up to the Asian Financial Crisis, Thailand was overshooting on its growth-rate, clocking at over 7% per year. After that, the growth-rate rebounded, but only to about 4%. Now, however, growth has pretty much settled at 2.5-3%. Thailand is losing its competitive edge and the current economic model no longer works.

In the past 10 years, three major changes have occurred which Thailand has done little to remedy; labour shortages, underinvestment and competition from the rest of the ASEAN markets. In terms of labour shortages, this concern is exacerbated by how much older Thailand is than the rest of the region. The working age in Thailand will peak next year, while the next closest in terms of demographics is Indonesia, which is still 20 years behind Thailand today. The median age of Thailand is about 35 – when Singapore and Korea were that young, they were four times and twice as rich respectively compared to Thailand’s position today; we need to change our economic infrastructure to accommodate much older populations and shrinking demand for goods and services. Not only is Thailand’s population getting older, but the quality of our human capital and education is dropping too. The skills of recent graduates do not match the requirements of Thai businesses, especially SMEs.

Thailand’s service industry is where the greatest advancements could be made through the Thailand 4.0 policy; it could be a low-hanging fruit.

All of the ASEAN countries have become great competitors to Thailand. If we look at FDI to developing countries in ASEAN, in the past Thailand’s share was around 30%, but now it’s about 15%. Indonesia and Vietnam, largely due to their improved institutional stability, have soaked up a lot of this FDI. Focussing on FDI diverts our attention away from some of the changes we need to make at home, for example, investment in R&D. If we look at Korea, it invests about 4-5% in GDP, Thailand is still much lower.

For Thailand 4.0, instead of focussing on picking winning or losing industries in the private sector, the government should look into lowering the barriers and red tape to investment, ranging from the ease of opening a business to customs and taxes. As we shift to a digital economy, we must make sure the regulations we have are simple and consistent. We must also improve our education system; if Thailand is to improve its human capital, it must start in schools and universities.

 


 

Mr. Prinn Panitchpakdi

Managing Director,

CLSA Securities (Thailand) Limited

 

When the rule of law is not being used for developmental purpose, but is rather being used only for punishment, the creativity needed for certain industries to grow with be hampered. Fintech and creative, innovative businesses need an open regulatory sandbox to prosper, as they have done already in places like Singapore, Malaysia, China and the United States. Thailand is not on the same path those countries, in some part due to the public sector and the regulatory framework that is currently in place. Real change could begin with the reform of the civil service.

Another sector that could be opened up is the Thai banking sector. The profitability of the Thai banking sector is enormous, and it still enjoys many protections and regulations that shield it from a truly competitive environment. Thai banks and the government claim that they want to help the little businesses, that they want to promote Fintech and new industry – one area that could be made more competitive is the banking sector itself.

R&D is exceptionally weak in Thailand as most businesses see it as a cost rather than an investment or an avenue to generate new income in the future. Businesses cannot be complacent and ignore R&D.

The Thai education system does not teach children to question or think outside of the box. When children are not given these important critical thinking skills or they do not have a quality education, they now become especially vulnerable to fake news and misinformation on their smartphones. Even as information becomes more accessible through mobile phones and social media, we must be aware that the information may not be correct or of high quality.

There is some good news: the government is waking up to the actions needed in some areas. The Prime Minister has good intentions, especially on education reform and the building of the Eastern Economic Corridor. Completing this reform and investment infrastructure will take time and political will. Adopting a 20-year strategy is a good start towards these goals. Many Thai firms are also expanding abroad, from big firms like CP and ThaiBev to small and medium firms like Jaymart and Major Cineplex. To cope with Thailand and Industry 4.0, we need to build brands from within that customers around the world can visualise, see, trust and use. The government itself should be the champion of this OFDI – it could follow in the path of MITI or JETRO to push domestic firms abroad.

Most young Thai consumers are now accustomed to buying goods online, either through established online portals or through social media like Instagram. The trend suggests hyper-growth for e-commerce. Goods sales is only 2-3% online, and there will still be a brick-and-mortar presence for firms like the Central Group, but e-commerce will only go up

 


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