A different model: The hunt for new economic drivers is on

Current economic strength has come from exports to the world’s most-developed economies; the result of decades of consistent economic policy on foreign investment. A combination of incentives for foreign manufacturers, low-cost labour and economic zones called industrial estates have attracted globalised firms, along with their suppliers in the automotive and electronics sectors in particular.

NEW ECONOMIC HORIZONS: They have turned the estates into efficient and interconnected industrial hives, and Thailand became a middle-income country along the way. Now, with fears of a middle-income trap and exposure to troubled economies in customer countries, Thailand is looking for new economic drivers. A central question regards the degree to which the old export-driven model should be abandoned or updated to better suit current conditions.

Thailand’s thought leaders have put fundamental economic reform on the table based on their experience in recent years. The 1997-98 Asian financial crisis taught the country’s leaders to fear instability and capital flight in the financial sector. The 2008 global financial crisis left the economy exposed to factors beyond its control. Additionally, the 2011 flooding, as well as other recent natural disasters such the Japanese tsunami earlier in the year, have provided yet another argument against relying on global manufacturing and the just-in-time efficiencies on which this industry thrives.

Manufacturing in Thailand is a complex ecosystem on an unstable platform. Risk is on the rise, and the ruling Pheu Thai party has made reducing reliance on exports a significant part of its economic policy.

SEARCHING FOR SOLUTIONS: The diagnosis is known but the remedies are not. What is obvious is that unlike other Asian economies such as China, India or Indonesia, the scale of domestic demand will not drive growth – Thais total around 65m, far smaller than those other three, and therefore domestic demand alone will not create economies of scale. Plans floated so far appear to be focused on a common set of recommendations for medium-sized countries at this stage of economic development: pushing for more indigenous entrepreneurship and coaxing foreign firms to locate research-and-development operations in the country, in addition to lower-wage assembly jobs.

Some policy evolutions to move beyond manufacturing have already begun. A change in corporate tax rates will drop the percentage paid by local firms. Thailand also aims to attract higher-end jobs by creating incentives for foreign companies that put a regional headquarters in the country.

Ignoring exporting in a drive to create higher-paying jobs could be overkill, however, and a middle way could mandate simply adjusting the approach. Thailand and other South-east Asian export-driven economies are increasingly trading with each other instead of selling to the world’s richest countries. In some cases they are sending each other semi-finished goods, which will eventually end up in the traditional export markets.

But as finished goods become a larger part of the total, a formal policy response to this trend may be needed to recalibrate the manufacturing sector for a different set of customers. The government seems to recognise that exporting will still be important. Prime Minister Yingluck Shinawatra made state visits to some of Thailand’s traditional foreign investments sources in March 2012, including Japan and South Korea. Her public statements reiterated the message that the industrial estates are open for business and Thailand is still encouraging foreign companies to be situated in them.

“Thailand still has some strong advantages for growth as labour is not too expensive, despite the rises in 2012, but ultimately it needs to move up the value chain,” Pisit Leeahtam, the former deputy minister of finance and the country director for the Thai office of Jardine Matheson, a conglomerate with Hong Kong roots and interests throughout the Asia-Pacific region, told OBG. “There is a change in mindset for many industries who realise they can no longer rely on labour-intensive industries.”

CHANGES SO FAR: In addition to lowering corporate taxes, the Board of Investment (BOI) is tasked with attracting FDI, and has in its arsenal incentives aimed at 243 types of businesses. Tax holidays can be up to eight years, and waivers are available for certain tariffs. There are about 1000 ventures in Thailand that have been established by foreign interests that have taken advantage of BOI incentives.

Thailand’s cabinet in October 2011 approved the drop in corporate tax rates, lowering them from 30% to 23% in 2012, and to 20% for 2013. It is hoped that this move will boost competitiveness and creativity in the economy. Lower rates could also convince companies operating informally to formalise their existence, which would help in boosting tax revenue.

RECALIBRATION: The argument includes simply adjusting the export sector to reflect the growing regional trade story. Economies in South-east Asia have been more resilient than expected since the 2008 financial crisis, helped by prudent financial regulation and steady demand within the region. But the intra-regional trade story did not start then – the crisis only made it obvious. Intraregional exports in South-east Asia have been growing at a faster rate than global exports for more than 10 years. According to UN data, exports from the Asia-Pacific region doubled between 2000 and 2009, but intraregional exports rose almost 2.5 times.

In Thailand, China became the largest trading partner in 2010. China’s share of Thai exports has roughly tripled in the past decade, from about 4% to about 12%, according to figures from the Bank of Thailand, the country’s central bank. In the same period the EU zone’s share of exports fell from 17% to 11%, and North America’s from 22% to 11%.

“It’s clearer every day that the region needs to look within in these cases,” said Shuvojit Banerjee, a Bangkok-based economist for the UN Economic and Social Commission for Asia and the Pacific. “China, India and Indonesia are already massive and growing markets. The opportunities already exist.”

The regional trade story would not necessarily be that of a balanced environment of like-minded actors, however, finally free from the vagaries of the global economic cycle – unbalanced relationships would emerge in such a system just as they have in the current one. For Thailand, moving to a regional focus would mean shifting some of its exposure. That would not eliminate exposure to external factors, and it is becoming increasingly difficult to find importer countries not exposed to global volatility. However, the new patterns have thus spread the risks thinner, which should reduce exposure to external shocks.

WEIGHING THE BENEFITS: The question is whether a policy shift and money spent to embrace this trend would be worth the trouble. Economists are focused on the question now, pondering issues such as whether the industrial sector would require capital expenditure or organisational reforms in order to target a different group of customers, and whether chasing the rewards of regional trade is a zero-sum game that would imply turning away from old markets or something that can be done in tandem.

Continued investment in social assets and infrastructure will be necessary. That means ensuring additional spending goes toward improving schools and vocational training, adding transportation assets such as broadening the public transit in Bangkok, and increasing liquidity and sophistication on capital markets, both to give companies more financing options and to encourage Thais to move their money out of savings accounts and into securities.

Strengthening pension programmes and unemployment insurance services would also help funnel cash toward consumables and encourage companies to hire. Boosting efficiency in agriculture will help by combating food price shocks, which have been on the rise due to global instability and greater speculation on commodities through financial markets.

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The Report: Thailand 2012

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