Moving Up the Global Value Chain: Thailand's Upgrading and Growth Imperatives

 Thursday, 18^th June 2015 at 09.00 – 11.30 a.m.

The Chumbhot-Pantip Conference Room, 4^th Floor Prajadhipok-Rambhaibarni Building
Faculty of Political Science, Chulalongkorn University

 ................................................................................

Assoc. Prof. Dr. Ake Tangsupvattana
Dean, Faculty of Political Science, Chulalongkorn University

Speakers:

Assoc. Prof. Dr. Pavida Pananond
Associate Professor of International Business
Thammasat Business School

Dr. Kirida Bhaopichitr
Senior Economist, Macroeconomic & Fiscal Management Global Practice
The World Bank Group

Dr. Roong Poshyananda Mallikamas
Senior Director, Macroeconomic and Monetary Policy Department
Bank of Thailand

Dr. Deunden Nikomborirak
Research Director, Economic Governance
Thailand Development Research Institute (TDRI)

Moderator: 

Ms. Gwen Robinson
Chief Editor, Nikkei Asian Review,
Senior Fellow, ISIS Thailand

 ........................................................................................

Videos: Moving Up the Global Value Chain: Thailand's Upgrading and Growth Imperatives

Moving Up the Global Value Chain: Thailand's Upgrading and Growth Imperatives 1/3: 
www.youtube.com/watch

Moving Up the Global Value Chain: Thailand's Upgrading and Growth Imperatives 2/3: 
www.youtube.com/watch

Moving Up the Global Value Chain: Thailand's Upgrading and Growth Imperatives 3/3: 
www.youtube.com/watch

If you wish more detailed information concerning this seminar please click 
http://www.facebook.com/ISISThailand 

 .......................................................................................................................

Introductory Remarks:

Assoc. Prof. Dr. Ake Tangsupvattana
Dean,
Faculty of Political Science, Chulalongkorn University

Thailand’s economy barely expanded by 0.7% last year, and growth forecast for 2015 has been revised downwards again and again from 4% down closer to 3%. While Thailand’s trend growth is partly attributable to a decade-long political conflict, structural constraints in the Thai economy pose a more serious and lasting concern for future economic expansion. Even if Thai politics is more stable, the Thai economy is still in trouble because it has been stuck in the so-called “Middle-Income Trap” for more than a decade, sandwiched between neighbouring economies that offer either higher skills and value-added or lower labour costs.

As a result, Thailand’s economic growth has reached a plateau with downside risks. Its upward trajectory cannot be taken for granted. Managing growth with relative stability and equity as an upper middle-income economy requires less emphasis on labour-intensive industries and greater reliance on economic upgrading and moving up the “global value chain.” While they are integrated into regional and global production networks, Thai industries and firms have yet to move up value chains by innovating, upgrading, and capturing more value. Economic upgrading is thus imperative for the future expansion of the Thai economy.

This public forum aims to assess Thailand’s current growth capabilities, strategies, and policies that can lead to economic upgrading and sustain economic expansion going forward. You might ask why we are holding a seminar on the Thai economy at this time. The answer is twofold. We want to assess the immediate prospects for Thailand’s economic doldrums. But at the same time we also want to look at medium- and longer-term structural challenges in a constructive fashion. How can we keep Thailand’s impressive growth story on track going forward?  We all have a common vested interest in seeing the Thai economy expand on a sound and sustainable footing for many years to come. This forum will seek and try to tease out some of the insights and ways to do so.

Dr. Roong Poshyananda Mallikamas
Senior Director, Macroeconomic and Monetary Policy Department
Bank of Thailand

The Bank of Thailand’s 2015 GDP growth estimate of 3.8% was released in March, however the next estimate is likely to be revised down. Not just the Bank of Thailand, but also the Ministry of Finance’s Fiscal Policy Office and the National Economic and Social Development Board have consistently downgraded their growth forecasts since the start of year. However, if you compare it to 2014, the steepness of the downward slope is not so severe – there was an extraordinary event in May 2014 which had not been factored into GDP calculations at the beginning of the year. In 2014, GDP expectations began at about 5% but ended below 1%. 2015 will be less challenging, but there are still downsides and risks, and the BoT will revise their growth forecasts down again. The export performance of the Thai economy has been weaker than expected; this may be in part to do with slowing world growth and China’s weakening, but the main impediment to Thai growth can be found closer to home.

The 25-year growth path of Thailand projects a telling story. Prior to the 1997 Asian Financial Crisis, Thai growth averaged 6-8%. Afterwards, it slipped to 5-6%, now it is tracking at around 2-3%. It seems like Thailand has lost its ‘impressive growth story.’ It will be a great challenge to regain it. 

Before the GFC, Thailand and Asia’s export volumes and global GDP (roughly analogous to Trading partners’ GDP) has a similar correlation. However, since the GFC, Asia’s export volume has not sustained the same ratio of world growth. Thailand’s exports have performed even worse than Asia’s, having plateaued since the 2011 floods.

Thailand has been slow to move up the Global Value Chain. Thailand’s exports have not drastically increased in sophistication in the past 15 years, particularly in comparison to countries at a similar level of development, such as China, Vietnam. For example, in electronics, all nations face the same global demand for electronics. In 2014, Thailand’s growth in electronics was the worst among similar countries in the region, clocking in at only 1.8% growth. The Philippines, by contrast recorded over 12% and Taiwan 10% under the same conditions as Thailand. This suggests that the global market, the strength of Thailand’s currency or demand are not the reasons for sluggish growth, but it is structural problems in the Thai economy and what the country is producing which is to blame. Thailand now exports the stuff that people no longer want. The world now wants iPhones, tablets and notebooks, while Thailand is still producing Hard Disk Drives (HDD). The global electronic demands is growing, but Thailand is getting left behind.

Thailand has been stuck in an efficiency-driven (transferring labour from the agricultural sector to the manufacturing sector, or investing more capital to be more productive) stage of development for too long. Given that Thailand has the lowest unemployment rate in the world, we cannot continue to rely on more people moving from agriculture to manufacturing. The growth model needs to change. Thailand has to move into more innovation- and knowledge-based activities. However, in the areas which drive the transition to innovation-based activities, such as technological readiness, higher-education and training, labour market efficiency, strong institutions and innovation readiness, Thailand lags way behind its neighbours.

Dr. Kirida Bhaopichitr
Senior Economist, Macroeconomic & Fiscal Management Global Practice
The World Bank Group

Thailand is now categorised as having moved from a ‘lower-middle income country’ to an ‘upper-middle income country.’ Its annual GDP per capita income ranges from 4,000 to 12,000 USD. Historically, it has been fairly easy for countries to make this step up (low-hanging fruits such as structural adjustments, regulatory reforms, urbanisation take place easily), however, far more difficult has been the transition all the way up to a ‘high income country.’ Thailand has been at the middle income status for at least the last 25 years, and can be considered to be stuck in the Middle Income Trap.

How can Thailand move up the value chain to become a high income country? Unfortunately, Thailand recent growth rate of around 3.5% is not fast enough to move out of the Middle Income Trap.Growth is driven largely by Export Services (17.8%) like tourism, and public investment (13.1%). Thailand is not seeing spectacular growth in Export Goods or Private Investment which are essential factors which drive an economy forward in the next 5-10 years.

There is a lot of capital coming into East Asia, even into Thailand (more often than not in the form of mergers and acquisitions.) Even after the coup in 2014, FDI still came into the country at reasonable rates. As a part of ASEAN and East Asia, both fast growing and dynamic regions, Thailand remains a very attractive country for foreign investment.  

When Thai businesses see troubles emerging in their home country, they invest abroad. The rate of OFDI has been rising consistently every year (with an outlier in 2012). This is reflective of strengths in the Thai economy.

The global economy is recovering, but not as fast as expected or hoped. Growth will be led by the United States, which is a major market for Thailand and the region. China’s growth will slow down – for China a slowdown means logging growth around 7% which is still very impressive for the world’s second largest economy. Importantly, India will become the new ‘rising star’ for economic growth, expected to surpass China’s growth rates this year.

Thailand will continue to grow slowly. It will not revert back to pre-GFC, pre-Eurozone crisis growth rates. This means that its economic outlook is not so rosy and will have more competitors as neighbours catch up. Also, while Thailand has benefitted from a softening in the global oil and commodities prices, agriculture (such as rubber and rice) has also slowed significantly, so export revenues with suffer in the foreseeable future. Therefore, should Thailand still strive to be the ‘Number 1’ rice or rubber producer in the world? Or should it diversify to sectors or products which are is higher demand (mobile phones, tablets or services). The United States will likely raise interest rates in the near future which will affect global interest rates. This will impact Thailand’s domestic consumption, particularly as its household debts levels are already extremely high. In addition, with an ageing economy, it will become difficult to remain competitive in agriculture or labour-intensive industries. Thailand will need to think about moving into sectors which are more knowledge-intensive and require more innovation, with less energy-intensive activities.

Thailand will need to improve in a lot of areas if it wants to achieve this. Innovation, labour productivity and market efficiency and education all need to be worked on to ensure Thailand remains competitive. However, in the past decade, Thailand has gone backwards in these areas, according to World Economic Forum statistics. In particular, in agriculture and manufacturing, sectors which collectively employ 40% of labour force, productivity has fallen. One of the ways to improve overall labour productivity is to improve the skills of these often rural, low-wage, labour intensive sectors, or, to move them into more productive sectors, such as the services sector (which also needs to improve its productivity).

Looking at standardised scores that Thai students take, Thailand’s scores (particularly from rural areas) are below countries like China and Vietnam. Countries which have escaped the Middle Income Trap have focused on developing and improving the quality of their human capital. This is the area Thailand should be focussing on now.

Assoc. Prof. Dr. Pavida Pananond
Associate Professor of International Business,
Thammasat Business School

Thailand’s GDP for the foreseeable future will not be as prosperous as it has been in the past. Thailand recorded double-digit growth in the late 1980s, but for now it will have to make do with the range of 3-4%. Compared to other countries, 3-4% may not be that bad; the average for the world economy is around 4-5%, so Thailand is not too far behind. However, Asia is expected to grow within the range of 6-7%, led by China and India, while Thailand will be the slowest performer in this region. Thailand will clock the slowest growth in what is the fastest growing part of the world.

Why is Thailand’s GDP growth so bad? People tend to focus on politics. The country has had a decade of political conflict which makes businesses and investors hesitant about Thailand. However, looking more deeply, Thailand&rsquo