Thai economy needs a growth strategy

Thai economy needs a growth strategy

The World Bank's projection that Thailand will remain the slowest-growing economy in Southeast Asia up to 2016 brings back the contrasting memory of Thailand's giddy era in the late 1980s, when the country clocked double-digit growth rates as the epicentre of regional economic dynamism.

This spectre of a growth slowdown is even harder to swallow considering that developing East Asia and the Pacific will remain the fastest-growing region in the world. Indeed, the Thai economy has become the weak link in the Asia-Pacific growth story. Thailand's descending growth trajectory deserves a closer look to determine how the country might find ways forward amid intensifying global competition.

Thailand's golden age in the late 1980s benefited from both external and internal growth factors. The change of industrial policy from import substitution to export-led industrialisation led to Thailand's openness towards foreign direct investment (FDI), combined with its increased export orientation. The relocation of production bases from Japan and East Asia to lower-cost Southeast Asia followed the 1985 Plaza Accord that realigned major global currencies and the revalued Japanese yen contributed to the growth of investment inflows.

Between 1985 and 1990, the flows of FDI into Thailand multiplied 10 times, surpassing the accumulated figure of the previous three decades. FDI also translated into export upswings, when foreign multinational firms used Thailand as their manufacturing and export bases. In the last three years of the 1980s, export growth exceeded 20%, which can only be viewed with nostalgic given prospects in 2014 when exports are expected to expand by less than 1%. While garments and cheap-labour sectors like shoes and toys were the first products to enjoy export booms, medium-tech industries, particularly electronics and auto parts, later made up a higher percentage of export income.

An outward-driven economic growth also transformed into domestic dynamism. Urbanisation and the expansion of the country's growing middle class contributed favourably to many service sectors that catered to new urban consumers. Retail, real estate, telecommunication, health care and media were among the sectors that gave rise to a new breed of Thai business tycoons. The Thai economy became more diversified, with agriculture still prominent in the rural parts of the country and manufacturing and services concentrated more around larger cities, especially the Bangkok metropolitan area. With an average double-digit growth in 1987-1990, it looked for a time like Thailand was on the up and up.

Perhaps such a strong economic performance bred complacency. Thailand's export-oriented manufacturers were busy meeting increasing global demands without thinking about how to further advance their capabilities. Orders flooded in via different channels — independent global buyers as well as subsidiaries of the same multinational firm parents, making day-to-day operations already demanding, let alone planning for future upgrading. There was enough demand to lead Thailand-based firms to believe that exporting to their global export markets could continue in the long run without the need to do much more than be efficient and have low-cost manufacturing.

To be fair, some firms worked harder than others and focused on improving their technological capabilities through technology transfer and learning by doing. Those that invested more in their upgrading trajectory, however, tended to be subsidiaries of multinational firms, whose headquarters put emphasis on product and process upgrading to improve their subsidiary's efficiency. Domestically owned firms trailed behind these foreign affiliates, partly due to their limited resources. In the automotive industry, for example, more than half of the gross output of the industry is produced by a relatively small group of foreign affiliates of multinational corporations.

Similarly, firms in domestic-oriented sectors were content with booming demand from Thailand's growing middle-class consumers. Thailand's domestic market was relatively protected from foreign competition in the years before the 1997 crisis. This situation prompted large local players to pay more attention to diversifying into new growth industries, with less emphasis on developing strong industry-specific advantages that could bring them up to international competitive standards.

Many of Thai firms emerged under this context, in which misplaced complacency impaired their vision for future competitiveness. Eventually, the 1997 crisis wiped out many weaker players and woke up those who survived to a much harsher reality. To understand the complexity of today's global business environment, Thai entrepreneurs and policy makers should pay attention to two important changes that could have long-term impacts.

The first trend is the increasing connectivity of industries through global value chains. Over the past decade, the disaggregation of production activities over geographically dispersed locations through networks of multinational firms has been a key feature of the international economy. Multinational firms today can choose to fine-slice their value chains into highly specific activities and spread them across countries and regions to benefit most from each location's specific advantages. Developing economies are often integrated into these global value chains as lower-cost supply and export bases.

The second trend is the increasing value of intangibles over tangibles. Value addition in products and services is derived more and more from knowledge-intensive activities in upstream (R&D, software, training) and downstream (marketing, brands, consumer service) functions. While production remains significant, the value creation in manufacturing activities is much more limited compared with those in upstream and downstream activities.

Given these two paramount trends, the need for Thailand to move up the value chain is not just a cliche to promote new, trendy and higher value-added sectors like high fashion or the digital gateway. In fact, coping with these trends requires a comprehensive evaluation of where the country's profile and industrial capabilities stand to determine how we can make appropriate choices in pushing forward Thailand's position relative to its global competitors. Only through a thorough understanding of Thailand's position in the value chain of industries in which it is involved can the country come up with appropriate plans to increase its value creation.

Such an understanding should form the basis of a longer-term economic development strategy of where Thailand wants to be in the next decade and beyond. What we need is a more in-depth policy framework that does not simply focus on myopic subsidies and cash hand-outs but one that shows a holistic and forward-looking understanding of how the Thai economy is deeply integrated into today's global economic forces.

Catching up in the era of global connectivity requires sobering and painful reforms that will enable the Thai economy to regain its dynamism.


Pavida Pananond is Associate Professor of International Business at Thammasat Business School, Thammasat University. This article is part of a joint research project on Thailand's Economic Upgrading, supported by the Asia Foundation.

Do you like the content of this article?
COMMENT (3)