Thailand Faces A Challenge To Beat The Middle-Income Trap

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Guest column

Thailand faces a challenge to beat the middle-income trap

Chodechai Suwanaporn

BANGKOK: -- Recently, the Thai government announced its country development strategies that cover four areas: overcoming the "middle-income trap"; promoting inclusive growth; achieving a "green" economy; and improving internal processes.

What I find most interesting and challenging for Thailand in the coming years is the first strategy: how to lift our economy out of lower-middle income status toward that of a higher-income economy. Indeed, the middle-income trap is generally defined as an economic development situation in which a country that has attained a certain income (due to given advantages such as cheap labour and natural resources) gets stuck at that level without graduating toward high-income status.

newsjsThe evolution of the middle-income trap is that countries can rather easily develop from their low-income economic status toward middle income using an excess cheap labour supply and natural resources. However, once they have achieved the middle-income level, they find themselves unable to compete further in export markets with lower-cost producers elsewhere (the so-called "nutcracker effect") and lack the innovation necessary for achieving higher value added production. Thus, they will always find themselves behind, and fail to catch up with advanced economies in higher-value products.

Typically, the World Bank finds that countries trapped at middle-income level often have the following characteristics: low investment ratios; slow manufacturing growth; limited industrial diversification; and poor labour market conditions.

The famous economics professor Paul Krugman eloquently summarised this phenomenon back in 1994 as, "Mere increases in inputs, without an increase in the efficiency with which those inputs are used - investing in more machinery and infrastructure - must run into diminishing returns; input-driven growth is inevitably limited."

The World Bank cites as classic examples of the middle-income trap South Africa and Brazil, which have languished for decades in what is called the "middle income" range (about US$1,000 to $12,000 gross income per person). Thailand now records income per capita at $5,395, which means we are still a long way from getting out of middle-income status.

Now, the Thai government intends to upgrade the Thai economy to move up the "value chain" through four policy frameworks: developing future industries and maintaining existing ones (i.e. the "kitchen of the world", auto production, medical services, biomaterials, etc); increasing the competitiveness of SMEs and the OTOP programme; promoting land zoning and efficient uses; and investing in infrastructure and logistics network.

The fourth policy will start the implementation stage within this year as the Bt2.27 trillion logistics investment programme over the next seven years (2013-2019), in which the government will execute a substantial Bt2 trillion in borrowing.

Whether the government will be able to implement these policies as planned remains to be seen. Personally, I think it is not a guarantee that Thailand will be able to avoid the middle-income trap within the next 25-50 years. Obviously, Thailand will benefit from the deeper integration of regional production networks to be expected under the AEC. The emergence of China also presents to us both challenges in terms of competition and opportunities to collaborate and rise with the Dragon. Nonetheless, I am glad that the government is beginning to take steps toward preparing the country to meet these future challenges.

Thhe Thai government will need to rethink many of its policies and long-term strategies to pave the way for the country to escape the middle-income trap for good. We need to emphasise the role of public infrastructure investment in promoting growth that is sustainable and productivity-driven. We need to create a "virtuous cycle" in Thailand, in creating reverse causality that runs back from higher growth to higher infrastructure investment - more investment generates higher growth, and higher growth results in more investment opportunities. There are numerous studies that have verified the positive effects of infrastructure investment on private investment and labour productivity.

Capital- and knowledge-intensive industries often benefit greatly from increasing returns on scale, particularly through knowledge spillovers. I am hopeful that the government will have the foresight to promote "hubs" for capital-intensive industries and establish "zoning" for those with lower capital intensity, with the overarching goal to achieve growth that is not only sustainable and productivity-driven but also inclusive in nature.

Lastly, physical infrastructure development is not everything. It is only a necessary but not sufficient condition for success. Long-term improvements in Thailand's economic wellbeing also require drastic social infrastructure measures - including, but not limited to, educational reforms; legal improvements, especially with regard to property rights and regulatory burdens for businesses; as well as improvements in government efficiency and good governance. Only with these all-round "upgrading" policies - physical and social infrastructures - will Thailand be able to achieve its potential and realise its goal of overcoming the middle-income trap within our generation.

Dr Chodechai Suwanaporn is executive vice president, economics & energy policy, PTT Public Company Limited. Chodechai.energyfact [at] gmail [dot] com

-- The Nation 2013-02-01

[OzMick]

The fastest way to raise average income is to stop subsidising uneconomic labour-intensive industries and use the money instead to increase the quality of education.

OTOH those subsidies buy a lot of votes.

[hearditallbefore]

Obviously he is a Bangkokian speaking about Bangkok as most of the farmers and the rest of Thailand is still on the poverty level. "Middle Income Trap"? You should be so lucky.

[Thai at Heart]

I would think plainly, that corruption (including making all companies and individuals pay their requisite taxes) followed by investment in education would be the right way to go?

Those countries that have achieved breaking out of this trap have invested very heavily in quality education, whereas those have haven't, didn't.

[Pib]

Thailand faces a challenge to beat the middle-income trap

Thailand still needs to concentrate on the challenge of the low-income (poor) trap.

[geriatrickid]

The fastest way to raise average income is to stop subsidising uneconomic labour-intensive industries and use the money instead to increase the quality of education.

OTOH those subsidies buy a lot of votes.

40%+ of the economy is agrarian related. Stop the subsidies and you'll quickly see a revolution that makes the redshirt protests look like a church picnic. If the industrial & manufacturing sector subsidies are stopped, the Bangkok hoi poloi will demand another coup d'etat.

If Thai railways didn't get a subsidy goods would double in price. If the AoT wasn't subsidized, the TVFers would be screaming for blood when their airline tickets passed on the true costs of using an airport.

[allucero]

The Thai govenment must apply assistance to the Thai people with learning the proper english language and computer (not games) schools for the young. Also, i don't see a lot of reading in the poorer area with adults or children. The jobs from other counties are manufacturing, seamstress, wigs, or security. In the resorts the're boat drivers, assistances, sales persons, garment sales, and shop sales. These are jobs that Thai's make a living on with their families. They can't buy a home and they are stuck in that mud (so to speak) when there is no hope. The men drink themselves to death and die before 60 years old... The Thai women which eake care of their childrens children sometimes not seeing their children but once a year. This is a continous cycle... Until the govenment assists with a new way this will not change. I hope for the best for the future Thai's...

[brianP]

Same story, different country. The rich get richer and the poor are kept down, while the middle class pays for most of it!

[Plastic Brontosaurus]

As mentioned in the article, regulatory burdens for businesses need to be addressed. One key element would be leveling the playing field so that foreigners can own businesses in Thailand outright and have the same rights as Thai business owners. This also requires significant improvements in the legal framework.

I will be starting two (multinational) businesses in the next couple of years, but whilst I would prefer them to be Thai companies, I will instead incorporate them in either Hong Kong or Singapore, as the risk and trouble of making them Thai companies is too great. The bottom line is that because of this decision, labor will still come to Thailand as a result of these businesses being started, but much of the profit will stay overseas. I'm just a small player; I'm sure many other non-Thai business people as well as overseas companies have similar concerns and thus Thailand misses out on opportunities.

[Thai at Heart]

Brazil has land distribution worse than Thailand but not much worse.

Something has to be taxes to pay for education

[qdinthailand]

I thought the article was going to be about the cycle of buying now on credit, worry about paying off the debts later, stuck in a job that you hate because its the only way to keep paying the bills. That to me is the middle class trap.

[seminomadic]

Obviously he is a Bangkokian speaking about Bangkok as most of the farmers and the rest of Thailand is still on the poverty level. "Middle Income Trap"? You should be so lucky.

Given how exceedingly greedy many of the poor I've encountered in the rest of Thailand and how corrupt and hyperconsumerist the culture is at large, it's really too hard to be sympathetic to this plight.

[louse1953]

Obviously he is a Bangkokian speaking about Bangkok as most of the farmers and the rest of Thailand is still on the poverty level. "Middle Income Trap"? You should be so lucky.

Given how exceedingly greedy many of the poor I've encountered in the rest of Thailand and how corrupt and hyperconsumerist the culture is at large, it's really too hard to be sympathetic to this plight.

BS.Is there something wrong with wanting a better life.I find Thai people very giving,if you want greed go to the west.

[retsdon]

Education is the key. Unfortunately the education system in Thailand is scandalous given the amount of money that's supposedly spent on it.

[sirineou]

I have an Idea, develop a stable political system,

In order that businesses invest in long term project they need a stable system so that they can make long term projections.

[Local Drunk]

The fastest way to raise average income is to stop subsidising uneconomic labour-intensive industries and use the money instead to increase the quality of education.

OTOH those subsidies buy a lot of votes.

40%+ of the economy is agrarian related. Stop the subsidies and you'll quickly see a revolution that makes the redshirt protests look like a church picnic. If the industrial & manufacturing sector subsidies are stopped, the Bangkok hoi poloi will demand another coup d'etat.

If Thai railways didn't get a subsidy goods would double in price. If the AoT wasn't subsidized, the TVFers would be screaming for blood when their airline tickets passed on the true costs of using an airport.

So it ain't about the people...

[MaxLee]

I think Thailand rather faces the SAVING-FACE STATUS-ME-ME-ME-I-DONT-WANNA-SOIL-MY-HANDS-WITH-DIRTY-WORK-TRAP or in other words ENGINEERING-MACHINERY-AND-SCIENCE-IS-A-LOW-STATIS-JOB-TRAP....

Or even simpler... Especially for spoiled brats, they'll face.... YOU-KNOW-WHO-MY-FATHER-IS-TRAP

[Local Drunk]

Obviously he is a Bangkokian speaking about Bangkok as most of the farmers and the rest of Thailand is still on the poverty level. "Middle Income Trap"? You should be so lucky.

Bankrupting the country with a populist rice scheme does nothing for Bangkok or the farmers any good. The farmers can't currently be paid for the rice they have sold under the government's policy.The government currently has no buyers for the millions of metric tons that they purchased under the policy to get the farmer's votes which under the afore mentioned policy is currently rotting away in government warehouses.

Ask the farmers this. The government seemed able borrow a few trillion plus baht with no problems to buy a train that won't even go to Chain Mai... They also seem to have billions to pay out for bonuses to government employees, but you the farmers have to wait in line?

Well if they don't get paid they won't have the money to replant (unless they borrow against their sales to the government) and they'll have even less income after the next season because the government simply can't continue to buy their rice under this policy.

The farmers are screwed... Leave the middle class out of this.

[zydeco]

I would think plainly, that corruption (including making all companies and individuals pay their requisite taxes) followed by investment in education would be the right way to go?

Those countries that have achieved breaking out of this trap have invested very heavily in quality education, whereas those have haven't, didn't.

They can invest from now till the cows come home and it will not do any good. Throwing money (aka: investment) solves nothing by itself. The problem lies in the fact that there simply are not enough qualified people in this country to: teach, build high speed rail, regulate flood control, engage in sustainable agriculture, or build/operate mass transit. The people who do receive advanced educations do so in fields that do not contribute to these areas. Aside from some fair to decent graduation rates in medicine, most Thai university students diddly bop their way through soft subjects and plan on careers in "management," business, politics, tourism, and restaurant management. Not many physicists, engineers, chemists, research biologists, etc.