Thailand’s barren agriculture and services industries key to growth

18 July 2017
Author: Deunden Nikomborirak, Thailand Development Research Institute

Thailand’s economic performance during the past decade has been lackluster with GDP growth in 2015 averaging only 2.93 per cent, compared to the broader ASEAN region’s 5.33 per cent. The figure was the lowest among member countries bar Brunei, which suffered from a sharp decline in oil prices. What made Thailand, once an ‘Asian Tiger’, become the ‘sick man’ of the Southeast Asian region?

Thailand's Prime Minister Prayuth Chan-ocha gestures during the 'Thailand's Big Strategic Move' conference in Bangkok, Thailand, 22 June, 2017. (Photo: Reuters/Athit Perawongmetha).

Thailand’s Prime Minister Prayuth Chan-ocha gestures during the ‘Thailand’s Big Strategic Move’ conference in Bangkok, Thailand, 22 June, 2017. (Photo: Reuters/Athit Perawongmetha).

Long-standing domestic political instability that began with the military coup in 2006, and which increased with subsequent political polarisation between the red and yellow shirts, no doubt dampened the country’s economic potential. But the real problem lies in the economy’s structure.

In the past, Thailand was able to enjoy double-digit economic growth as labour moved from the low-productivity agricultural sector to the higher-productivity manufacturing sector. The agricultural sector’s employment share duly fell from 70 per cent in 1980 to 35 per cent in 2015. During the same period, the industrial sector’s employment share increased from 11 per cent to 24 per cent. But now with rising labour costs, the expansion of the manufacturing sector has slowed down remarkably. Many labour-intensive industries, such as textiles and electrical appliances, have either shut down or moved to neighbouring countries such as Laos or Cambodia where wages are lower and semi-skilled workers more abundant.

This ‘hollowing out’ of the industrial sector is a common phenomenon that has been experienced by most developed countries. But it is happening to Thailand when it is not yet a high-income country. Unable to move up the industrial ladder, the Thai economy appears to be caught in the middle-income trap. Worse, with extremely low fertility rates, the country is expected to become an aging society, where 20 per cent of its population will be over 60 by 2025. Thailand will become old before it becomes rich. This is worrisome.

The solution to Thailand’s ailing economy lies in the sectors that have long been neglected: services and agriculture. Decades of rapid industrial development have doubled labour productivity in manufacturing but left that in the agriculture and services sectors completely flat. In 2014 the value added per worker in the services sector was roughly 70 per cent of that in manufacturing. For the agriculture sector, the figure was a dismal 7 per cent.

The yawning productivity gap illustrates the unbalanced nature of the Thai economy that has resulted from long-standing economic policies focused narrowly on the export-oriented manufacturing sector. Generous tax incentives have been doled out almost exclusively to manufacturing industries. But even after its stellar growth in the eighties and nineties, the manufacturing sector still employs only 24 per cent of the labour force today, whereas 76 per cent still toil in the low productivity — and low wage — agriculture and services sectors. How can Thailand ever hope to increase its per capita income if the majority of its workforce is stuck in the much less developed part of the economy?

There are short and long-run measures that can help boost productivity in the services and agriculture sectors. In the short term, Thailand needs to loosen up its overly restrictive foreign investment law. These two sectors have been starved of much needed foreign investment since foreigners are barred from holding a majority equity share in most service and agriculture-related businesses. The agriculture sector contributes to approximately 10 per cent of the country’s GDP, but received only 0.06 per cent of the total foreign direct investment flowing into the country in 2016. No wonder productivity in this sector is so low. In contrast, there are no foreign investment restrictions in the industrial sector. Almost half of foreign direct investment inflow goes to the manufacturing sector, which contributes to 40 per cent of GDP.

But foreign capital and technology alone will not be sufficient to move the Thai services and agricultural sectors forward. Thailand currently lacks professionals equipped with skills well-matched with the ‘knowledge-based economy’ or the ‘digital 4.0 economy’ that the junta is striving for. Thailand needs to import an array of professionals to support local businesses such as technicians, IT experts, accountants and legal experts. Sector specific skilled personnel are also required to support the aircraft maintenance, repair and overhaul industry that is supposed to be the highlight of Thailand’s Eastern Economic Corridor development project. Again, the country’s foreign employment law, combined with the by-laws of various professional associations, do not accommodate skilled labour.

While the importation of foreign capital, technology and skills will give a short-term boost to the service and agricultural sectors, Thailand needs in the longer run to develop its own capacity to innovate and supply skilled labour. How can there be technology transfers when there are no skilled local employees to absorb the technology?

Education is the key to the future of the Thai economy. Unfortunately, education is Thailand’s Achilles’ heel. Although a good 20 per cent of the government budget is dedicated to education, there is little to show in results. The 2015 Programme for International Student Assessment conducted by the OECD ranked Thailand 54th for mathematics, 57th for reading and 54th for sciences out of 70 countries — a fall from previous years. Apparently, the country’s economic progress over the past 15 years has done nothing to improve the quality of its education system.

Overhauling education, and in turn Thailand’s economy, is no simple task. But Thailand will face serious competitive challenges in the long run unless there is more serious commitment to reform at the highest level.

Deunden Nikomborirak is the Research Director at the Thailand Development Research Institute.

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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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