When it rains, it pours. This rings true for the economy, as the political unrest has significantly hurt an economy already weak from last year.
Our GDP growth of 2.9% in 2013 was disappointing. Growth from 2008-2013 was similarly unimpressive, averaging just shy of 3% annually. That is well below the 5% average growth rate during the 2000-2007 period. As for 2014, the SCB Economic Intelligence Centre (EIC) expects growth to be just 2.4%.
Our clear and present danger is political turmoil, which has derailed public investment and eroded investor confidence and consumer sentiment.
In the preceding years, the economy had been marked with calamities - external and self-inflicted. The global financial crisis curtailed demand for Thai exports starting in 2009. In 2011, nationwide floods crippled farms, factories and households alike. In May last year, the mere mention of QE tapering sapped investors’ appetite for emerging markets.
To combat such external shocks, governments resorted to populist policies as a quick way to stimulate the economy. But those measures have proven to be not very well thought-out, with harmful results like skyrocketing household debt.
What about the next five years? Gauging an answer requires looking beyond factors like politics and disasters to focus on the nation's underlying growth potential.
Unfortunately, the outlook for growth potential is discouraging. If we continue on our current path, we might never again see the high output growth of the early 2000s. Thailand’s new normal is likely to be an annual GDP growth rate of around 3%.
The economy appears to have gradually undergone structural change in three areas that has significantly reduced its capacity to expand: ageing demographics, stagnated capital investment, and weak productivity.
Thailand will no longer get an economic boost from having a young workforce — the so-called demographic dividend. The share of the population aged between 15 and 59 reached its peak at 68% in 2010 and has declined steadily since that time. The contribution to economic growth from demographics will be near zero during the next five years (as discussed in my In Ponderland column in November last year).
A weakening of investor confidence which has discouraged capital investment is a relatively recent trend. Since the 2006 coup, Thailand’s growth in private investment — from both domestic and foreign sources — has significantly declined in comparison with peers among the Asean-5, which includes Indonesia, Malaysia, the Philippines and Singapore.
As for foreign direct investment (FDI), while our stock of FDI is still rising in absolute terms, we are the only one losing in terms of our share of the region’s total FDI inflow. Thailand’s average share of FDI inflows to Asean-5 was around 22% for the period from 2001 to 2006. That share fell to 13% from 2007 onwards.
Most worrying is the last factor: weak productivity (or what economists refer to as Total Factor Productivity). The EIC estimates that potential productivity growth over the past five years was about half of what it was during early 2000s.
This potential productivity involves optimising factors like research and development, infrastructure for logistics and other needs, the quality of education of the workforce and institutional environment taking in factors such as political stability, absence of corruption and ease of doing business with other governments.
Evidence shows that Thailand is falling behind in these important areas. Thailand’s R&D expenditure as a share of GDP has been roughly constant throughout the past decade, at around 0.2%. In contrast, the share has been rising steadily in China, now at around 1.8%, and Malaysia, now at 1.1%.
Another indication is the drop in Thailand’s rankings in the Global Competitiveness Report published by the World Economic Forum. In the 2013 survey, Thailand ranks 47th in terms of its institutional environment — a sharp fall from 40th in 2007. In infrastructure, Thailand was 47th in 2013, down from 38th in 2007. In technological readiness, the nation’s rank fell to 78th in 2013, from 48th in 2007. In innovation, Thailand’s rank fell to 66th in 2013, from 33rd in 2007.
These sharp declines partly reflect poor infrastructure development. Since the Asian crisis of 1997, Thailand has not undertaken any major infrastructure projects that reduce logistics bottlenecks, save for Suvarnabhumi International Airport, completed in 2006. Our mass transit systems built over the past decade are concentrated around Bangkok, and do not directly strengthen the transport of goods so that supply chains work more efficiently.
The grim implication of an ageing workforce, stagnant capital investment and weak productivity is that Thailand could well be facing a new and diminished economic reality: a low-growth trap. We need to refocus on increasing capital investment and improving productivity. The next government can do this by prioritising infrastructure programmes and investment landscape.
One bright spot in Thailand’s feeble outlook is its geographic position in the middle of the Mekong countries of Cambodia, Laos, Myanmar and Vietnam, with their wealth of resources and new, growing markets. Thailand has high potential to serve as this region’s hub for logistics and advanced production. But to succeed at this we must be equipped with better transport systems and logistics infrastructure.
Although the off-budget funding method proposed for the two-trillion-baht infrastructure plan was ruled unconstitutional, many parts of the plan could still be funded from the annual budget. This would show investors Thailand’s commitment to improving our infrastructure, while ensuring that project funding is done in an appropriate and transparent way.
Thailand must attract foreign investors who have new modern technology through improvement in the technical skill of our workforce and institutional environment for doing business. Most of our key manufactured exports, like hard-disk drives and other electronics, were imported technologies. They came to Thailand in search of young, trainable and low-cost labourers.
These exports helped rescue the economy in times of domestic trouble. At the moment, Thailand’s exports are not rising in tandem with the recent uptick in global demand, because these products are serving diminishing and outdated demand.
Foreign investment in modern technology might pass over Thailand as our former appeal wanes and our unceasing political turbulence tarnishes investment prospects. In the past, many governments conveniently turned to debt-generating stimulus measures to counter economic slowdowns.
The current high level of indebtedness among poor-income households allows little room to resuscitate our economy (discussed in my In Ponderland article: December 2012). The next government should avoid populist ploys and focus on programmes that truly enhance Thailand’s productivity on a lasting basis, or there may not be much sunshine to come after this political storm.
Sutapa Amornvivat, PhD, is chief economist and first executive vice president at the Economic Intelligence Centre, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT. eic@scb.co.th | EIC Online: www.scbeic.com