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Thailand's economy in 2010: Growth inbalance

By Frederico Gil SanderCreated 2009-12-29 16:01

Submitted by Frederico Gil Sander [1] on Tue, 2009-12-29 16:01

In the years since the 1997/1998 Asian financial crisis, the Bankof Thailand (BoT) worked hard to build a heavy fortress aroundthe nations financial sector. As a result, at a time when creditmarkets froze in developed countries and investors fled toquality, large amounts of capital still flowed into Thailand, wherebanks remained solid and well capitalized. Despite the financialstrength brought by prudent policies, for the first time since thefinancial crisis, Thailand will see GDP and householdconsumption drop, and poverty could even increase in 2009 [2]. It

is clear that the financial armor was insufficient to protect the economy from anothercrisis.

The culprit has been identified as Thailands excessive reliance on external demand,and talk of rebalancing growth towards domestic consumption and investment hasbecome quite common [3] (pdf). The idea of rebalancing makes some sense but itcan also be misleading. Let me explain [4].

In some ways, growth has been imbalanced. But its important to think of this conceptin a broad sense. It is true that growth has relied on exports, and constraints todomestic investment and consumption may be reducing the potential of local demandfor Thai goods and services to pull the economy along. But growth has also been

concentrated in certain sectors (manufacturing) and regions (Bangkok). So a strategyfor growth that is more sustained and resilient to shocks will need to do more thanjust boosting domestic demand:

To boost domestic investment: Lowering the costs of doing business bycomplementing investments in hardware (infrastructure) with a renewed focuson the software (improved regulations).

1.

To boost domestic consumption: Building social safety nets to allow individuals toreduce precautionary savings and to undertake more productive (but riskier)activities.

2.

To boost the services sector: Enhancing the productivity of the services sector by

increased competition and modern regulations, including more trade in services.

3.

To boost the economy outside Bangkok: Even if growth may naturally begeographically concentrated, government services need to be more evenly

4.

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delivered across different regions in the country.

In some ways, however, growth needs to be lessbalanced. Over the past 20years, the incomes of all income groups have grown at about the same pace (about 9percent per year in nominal terms). This has meant that inequality remainedpersistently high [5] during that period (indeed, inequality in Thailand is one of thehighest in East Asia). High inequality is associated with a greater probability of conflicts[6] (pdf), and Thailands current political crisis is in some ways related to high levels ofincome and geographic inequality.

Reducing inequality requires that the incomes of the poor grow faster than theincomes of the rich. This actually has happened in Brazil (where this current blogentry is being written) over the past decade, and Brazils notoriously high incomeinequality has been steadily declining for the past seven years and its now close toThai levels [7](pdf - only in Portuguese, but take a look at the charts. See also this pdf[8].).

How did Brazil do it? Transfers clearly helped the government here pays low-income families a stipend to boost their income and allow them to keep children inschool. An uneven increase in labor incomes (i.e., the incomes of the poor havegrown more quickly than those of the rich) has been equally critical to the reduction ofinequality. This likely reflects the fact that the productivity of low-income individuals hasincreased more quickly than that of higher-income workers. While the causes of thisunbalanced growth in labor incomes are not fully understood, a possible explanation isthat educational reforms implemented in the 1990s (which greatly expanded access tobasic education and incentives to conclude primary education) are currently bearingfruit.

There are two possible lessons for Thailand. First, although straight cash handoutsare likely to be quite unpopular in Thailand (indeed, there have been studies whichshow that Thais are generally culturally against cash handouts), transfer policiesshould not be dismissed outright[9]. Indeed, the governments new pension toelderly individuals not covered under the social security scheme provides one exampleof a transfer policy that targets a group that is over-represented among the poor. Othersimilar social insurance schemes may be feasible and desirable.

Second, Thailand needs to make it a top priority to upgrade the skills of itsworkers, especially among the most vulnerable. Unlike Brazil, access to education inThailand has been quite ample, and bricks and mortar are likely not the main

obstacle. Rather, a focus on reforming curricula to foster creative minds and researchskills and other educational policies is likely to yield the greater payoffs.

Tags: cash transfers [10] consumption [11] East Asia and Pacific [12] Exports [13]Finance and Financial Sector Development [14] financial crisis [15] GDP [16] Growth

[17] In-depth discussion [18] investment [19] Macroeconomics and Economic Growth[20] poverty [21] Thailand [22]

cash transfers consumption East Asia and Pacific Exports Finance andFinancial Sector Development financial crisis GDP Growth In-depth

discussion investment Macroeconomics and Economic Growthpoverty Thailand

Source URL: http://blogs.worldbank.org/eastasiapacific/thailands-economy-in-2010-growth-in-balance


20/03/2011http://blogs.worldbank.org/eastasiapacific/print/2857


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Links:[1] http://blogs.worldbank.org/eastasiapacific/team/frederico-gil-sander[2]http://www.worldbank.or.th/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/THAILANDEXTN/0,[3] http://www.tdri.or.th/library/quarterly/text/T5J2009.pdf[4] http://blogs.worldbank.org/eastasiapacific/thailands-economy-in-2010-growth-in-balance[5] http://www.bangkokpost.com/blogs/index.php/2009/11/30/thailand-s-shocking-inequity-statistics?blog=64

[6] http://ddd.uab.cat/pub/worpap/2009/hdl_2072_20342/76609.pdf[7]http://www.ipea.gov.br/sites/000/2/comunicado_presidencia/09_09_24_ComunicaPresi_30_PNAD2008.pdf[8] http://www.ipea.gov.br/sites/000/2/pdf/090924_ComPres30Ricardo.pdf[9] http://www.ipc-undp.org/pages/newsite/menu/socialprotection/whysocialprotection.jsp?active=3[10] http://blogs.worldbank.org/eastasiapacific/category/tags/cash-transfers[11] http://blogs.worldbank.org/eastasiapacific/category/tags/consumption[12] http://blogs.worldbank.org/eastasiapacific/category/regions/east-asia-and-pacific[13] http://blogs.worldbank.org/eastasiapacific/category/tags/exports[14] http://blogs.worldbank.org/eastasiapacific/finance[15] http://blogs.worldbank.org/eastasiapacific/category/tags/financial-crisis[16] http://blogs.worldbank.org/eastasiapacific/category/tags/gdp[17] http://blogs.worldbank.org/eastasiapacific/category/tags/growth

[18] http://blogs.worldbank.org/eastasiapacific/category/post-type/in-depth-discussion[19] http://blogs.worldbank.org/eastasiapacific/category/tags/investment[20] http://blogs.worldbank.org/eastasiapacific/category/topics/macroeconomics-and-economic-growth[21] http://blogs.worldbank.org/eastasiapacific/category/tags/poverty[22] http://blogs.worldbank.org/eastasiapacific/category/countries/thailand


20/03/2011http://blogs worldbank org/eastasiapacific/print/2857

thailands economy in 2010 growth in balance

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