When localizing the global economy to nation-state level,
there is understandably often a clear link with a country’s history. Despite
its modernization, Thailand has such a link, which to a large extent
explains its middle-income trap.
Still a rural economy
To start with, the kingdom has retained significant vestiges of
its feudal past; after all, slavery and serfdom were only abolished in the
20th century. Until then, this meant a shortage of labour (most Thai men
were courtiers, military or slaves) and social immobility, which inhibited
entrepreneurism.
Despite prohibition of rice and other agricultural
exports for many years, Thailand remained an agrarian economy. The
importance of the economic contribution of agriculture to the economy has
now started to wane and less people are employed in agriculture. However,
Thailand remains by a very significant margin the least urbanized economy
for a country of this size at this stage of development. This, along with
the continued abundance of essential resources, may explain the lack of
impetus for the kind of development that the trading hubs of Singapore or
Hong Kong enjoy.
Until this is resolved, then, despite the best efforts to
reach more sophisticated levels of socio-economic development - via
IMF-endorsed development programmes like Export Oriented Industrialization
(EOI) and Import Substitution Industrialization (ISI) - the foundations that
the edifice is built on remain fragile. To some extent this fragility has
been hidden by the fact that the Thai economy appears to have grown well
during the last 30 years or so.
1997 and all that
Thailand’s economic growth came at a price that suddenly had to
be paid in 1997 when Thailand suffered the consequences of having
accumulated international liabilities that dwarfed its international
reserves.
This goes some way to explaining Thailand’s volatile
growth pattern over that same period - where growth was highest in the
period during mid-1980s to late 1990s, until a fall in exports exposed the
structural problems even more - despite the export volumes Thailand had
become over-dependent on foreign liquidity and credit. The “Thailand’s
Economic Growth” chart on this page shows the volatile pattern clearly.
Although there have been some recoveries since the 1997 collapse, the
pattern still looks very fragile.
Yet that’s not the only problem: if we look at the development in GDP per
capita versus other Asian countries over the same period, Thailand is a
clear laggard (along with China), bogged down in the middle income trap
because of the inability to match the GDP per capita achievements of Japan,
Singapore, Hong Kong, Korea, Taiwan and most worryingly, Malaysia.
Thailand today
Thai GDP still remains largely export-driven as does the current
account; although the lessons learned from 1997 have reduced reliance on
foreign funding. The financial management of the economy has improved and
become more responsive to market demands.
However, export reliance remains a dangerous game,
especially when its performance is as volatile as Thailand’s, which largely
reflects that, apart from one or two outstanding successes, such as
automotive, it is still focused on exporting the wrong goods at too low a
value to the wrong buyers.
The future
Notwithstanding the financial system’s greater stability, the big
problem facing Thailand continues to be the socio-economic development
hiatus that has resulted in the inadequate emergence of a highly-skilled
urban workforce, escaping the middle income trap to become affluent
consumers. Although the numbers employed in the agricultural sector continue
to fall, this is not driven by any impetus to urbanize or industrialize.
Without this it remains difficult to see how Thailand can develop a wide
range of globally competitive businesses, despite the best efforts of
supportive organizations like the Board of Investment (BoI).
Solve that problem and you can really address how best to
create a much more harmonious society with higher levels of income and
wealth to better distribute. Without solving that, it looks increasingly
difficult to bridge the ever-widening political divide, with the looming
nexus of interwoven political, social and economic issues.
Ironically the very factors that made firstly Sukhothai, then Ayutthaya and
more recently Bangkok the hub of such a sufficient federated society also
rendered each of them less motivated to break the shackles of socio-economic
stasis. In the Sukhothai era the focus on individual and state survival was
the primary issue. In Ayutthaya the lack of development was overcome with
the short term fix of imported mercantilism. In the last century, the
reliance was on imported capital.
Those same factors continue to inhibit modern Thailand
developing in the same way as neighbours who have had to overcome the lack
of natural advantages with which Thailand was blessed but which, in
developmental terms, now seem to be more of a curse. There is a fine line
between sufficiency and complacency but many of the societal failings of
modern Thailand reflect the fact that for too much of its history, this land
of plenty has been content to rest on the laurels given to it in abundance
by nature.
My difficulty is that I don’t see anything that is likely to change that
without a very dramatic sequence of events which may involve experiencing a
very challenging period of transition. The current political situation may
or may not be the precursor to that but either way transitions of this
nature tend to be very difficult experiences for all involved.
However, there are silver linings - let us not forget that socio-economic
development will be underpinned by the success story that is the modern Thai
financial system. The fear of excess that has permeated since the 1997
crisis continues to ensure that Thailand’s banking system is well run and
its capital markets well regulated. The financial reforms that have taken
place then have created a solid foundation on which to build socio-economic
reforms - despite the political stress.
Thai capital markets look to be offering reasonably attractive value as soon
as the political divide is bridged and the vast majority of short-term ‘hot’
foreign capital has already fled the country. The much better
reserves-to-debt ratio means that a repeat of 1997 is not on the horizon,
despite what some commentators may say.
Thailand may not be developing in a way that enables the country to realize
its potential and may have some very unpleasant growing pains still to go
through but at least Tom Yam 2 the sequel is unlikely - debt has fallen
dramatically and yet reserves have increased in the 17 years since the
crisis.
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