Is Thailand’s Current Economic Growth Rate Sustainable?

Thailand’s current development model may not be able to sustain growth in the long term. Thailand needs to make the shift to a knowledge-based, innovative economy — and this means that policy settings will need to change.

Thailand’s economic development derives mainly from cheap labour. The manufacturing sector relies upon foreign technology. With comparatively low labour costs, as well as government support for infrastructure and investment incentives, the Thai manufacturing sector has thrived as the main driver of economic growth over the past few decades.

Thailand’s current development model may not be able to sustain growth in the long term. Thailand needs to make the shift to a knowledge-based, innovative economy — and this means that policy settings will need to change.

Thailand’s economic development derives mainly from cheap labour. The manufacturing sector relies upon foreign technology. With comparatively low labour costs, as well as government support for infrastructure and investment incentives, the Thai manufacturing sector has thrived as the main driver of economic growth over the past few decades.

However, this model of economic development is not sustainable. Rising wages hinder Thailand’s competitiveness in the region. In addition, as Thailand’s demographics are shifting towards a larger, ageing population (compared to fellow developing countries) it is likely to face a severe labour shortage in the near future.

Economic development without a technology industry leaves Thailand with limited trade gains because a large chunk of the benefit goes to foreign tech developers. To maintain a competitive edge, the minimum wage has to be suppressed, aggravating inequality. Thus, domestic purchasing power has never been adequate to spur the economy. Thailand must put faith in exports as a main engine of growth, greatly exposing it to global economic volatility.

Lessons from more successful countries such as South Korea, Taiwan, Chile and Malaysia indicate that sustainable development requires countries to generate domestic value through an innovative, knowledge-based economy. To achieve this, the government needs to play a vital role in transforming the economic structure.

In Thailand, numerous public policies aim to promote the development of a knowledge-based economy. For example, there are tax incentives for research and development (R&D) expenditure. The National Science and Technology Development Agency (NSTDA) also established the Thailand Science Park as a centralised innovation hub.

But the effectiveness of these policies is limited. Based on three major R&D indicators — the number of scientists and engineers per million, R&D expenditure to GDP, and the ratio of private R&D to public R&D — Thailand is well below other countries in comparable stages of development. It is clear that current policies will not lead the economy to the desired goal of building a knowledge-based economy.

While the quality chasm in present policies needs to be addressed, bridging the gap alone will not be enough to create a knowledge economy. Based on analysis of the reasons behind the decision to invest in R&D by Stock Exchange of Thailand (SET)-listed companies, other fundamental factors have undermined Thai companies’ ability to engage in R&D activities.

SET-listed companies are Thailand’s top-notch businesses. They should have the strongest capability to invest in R&D and absorb the risk of loss from possible failures. But in fact, they invest very little in R&D.

There are at least two government-related factors leading to this problem: the high share of sales to the public sector and the need for special licences to operate in certain industries.

Many businesses gain from the public sector both directly and indirectly. Direct benefits derive from government procurement. In 2014, the value of the government’s electronic auctions amounted to over 300 billion baht (US$9 billion). The auctions are not perfectly competitive as close relationships between companies and officials often play a key role in the likelihood of winning a deal. The public sector thus provides companies with a secure revenue stream.

On the other hand, issuing special licences brings indirect benefits to businesses. Stringent processes and specific qualifications for applicants — believed to be in favour of certain companies — hamper effective competition in industries where special licences are required to operate legally. Hence, businesses operating in these industries face less pressure to improve than those in other industries. Therefore, they are much less willing to invest in R&D.

The Thai government must do more than just implement a bunch of policies to promote Thailand’s move towards a knowledge-based economy.

It has to reconsider the appropriateness of the special business licence in sectors including energy, telecommunication and finance. Those licences should be given based on merit, independent of political motives.

The government needs to improve its transparency and fairness throughout the procurement process. It must also change procurement qualifications to support the economic development strategy. In order to maintain economic growth in the long term, the Thai government should help businesses that conduct in-house R&D instead of firms that only acquire foreign innovations.

Local innovation vital to sustain Thailand’s growth is republished with permission from East Asia Forum