Thailand’s Structural Challenges and Outlook

byChalongphob Sussangkarn

Thailand Development Research Institute

Presented at the American Chamber of Commerce Luncheon23 January 2002, JW Marriott Hotel, Bangkok.

Sustained Development Success Prior to Crisis

Satisfactory Development over Many Decades though not a Super Star

• Real GDP Growth averaged 7.4% per annum between 1960-1990

• Real Per Capita GDP growth averaged 4.8% during same period

• Proportion of Population under the Poverty Line declined from 60% in 1960 to about 20% in 1990

• Good Coverage of Basic Education and Primary Healthcare

• Although many remaining problems, such as economic disparities, social and environmental problems, Overall Development considered Satisfactory

Success Factors Prior to Crisis

Stability• Macroeconomic Stability• Social Stability

Quality• Agricultural Resources• Basic Education• Women Economic Participation and Contributions• Dynamism of Private Sector and Broad base of

Entrepreneurship

Success Factors Prior to Crisis (2)

Efficiency• Continual Economic Restructuring• Open Development Strategy forcing Internal

Efficiency

Hospitability• Good External Relations at the National Level and

at the Personal Level• Middle Path Society although somewhat Chaotic

The Path to Crisis

Over Confidence and Insufficient Awareness of Risks• Over confidence from the past Success, both within the

country and from outside (East Asian Miracle)

• Rapidly changing Comparative Advantages, and inadequate strategies to technologically upgrade the economic structure

• Thought the country could be competitive in sectors without any real comparative advantage, eg. Regional Financial Center

• Lack of risk management and financial discipline, whether at the macro or micro management levels

The Path to Crisis (2)

Stability became the Critical Problem

• Failure in Macroeconomic Management; Inability to adapt to the rapidly changing global financial markets

• Rapid build-up of Short-term External Debt to finance the Investment-Saving Gap

• Lack of Information and Understanding of the risks from Short-term External Debt

After the Crisis• Aggregate Recovery, though slowing down recently• Production Level still below pre-crisis peak putting a

constraint on debt-restructuring and new investment• Many remaining problems, such as NPL, lack of

liquidity for the real sector, and production restructuring

• Large Fiscal Burden for the Public Sector with concerns for ballooning public debt

• As a result of the exchange rate depreciation, the economy is now even more dependent on external trade

• Large Impacts from the World Economic Slowdown, Electronic Down Cycle and Terrorist Crisis. However, diversity of the economy helps to cushion impacts a little

Recent Adverse External Environment

• Signs of adverse external impacts came very early in 2001, Jan and Feb export growth negative

• Export growth even more negative in second half. For whole year negative growth of about 7.0% (in US$)

• Further compounded by terrorist crisis

• Export growth very important for the economy since the 1997 crisis, however impacts cushioned by depreciation of Baht in 2001 and diversified structure of Thai exports

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%93

/Q1

94/Q

1

95/Q

1

96/Q

1

97/Q

1

98/Q

1

99/Q

1

00/Q

1

01/Q

1

Ratio of Export of Goods and Services to GDP

Depreciation of Regional CurrenciesAgainst US$ in 2001

Indonesian Rupiah 17.8%

Philippines Peso 13.3%

Korean Won 12.2%

Japanese Yen 11.3%

Thai Baht 10.0%

Taiwan Dollar 7.6%

Singapore Dollar 3.8%

Shares of Export by Sector

1997 1998 1999 2000 2001(Jan-Nov)

Labor Intensive 22.2% 21.7% 21.2% 19.7% 20.3%

Technological 38.4% 40.8% 42.0% 44.0% 42.9%

IT Related 24.1% 27.0% 27.4% 28.3% 26.5%

Other Technological 14.3% 13.8% 14.7% 15.8% 16.3%

Food 20.3% 18.7% 17.4% 15.1% 15.4%

Others 19.1% 18.8% 19.3% 21.2% 21.5%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Further Constrains on Restructuring

• Slower growth makes it more difficult to restructure• Production Level still below pre-crisis peak putting a

constraint on debt-restructuring and new investment• Many remaining problems, such as NPL, lack of

liquidity for the real sector, needed production restructuring and excess capacities

• Very weak private investment• With declines in external demand, more pressures to

rely on Fiscal Stimulus from the Public Sector• Constraints from ballooning public debt and

effectiveness of fiscal stimulus due to low multipliers

550,000

600,000

650,000

700,000

750,000

800,000

94/Q1 95/Q1 96/Q1 97/Q1 98/Q1 99/Q1 00/Q1 01/Q1

Real GDP (Million Baht: 1988 Prices)(Seasonally Adjusted)

0

5

10

15

20

25

30

35

40

45

50

%

98/Q1 99/Q1 00/Q1 01/Q1

Ratios of Non-Performing Loans (NPL)

and Non-Performing Borrowing (NPB)

NPL NPBNote: NPB are ratio of loans that are non-performing even though they may be off financial institutions’ balance sheets, such as transferred to AMC.

0

10

20

30

40

50

60

70

80

95/Q1 96/Q1 97/Q1 98/Q1 99/Q1 00/Q1 01/Q1

Capacity Utilization: Excluding Liquor

0

50,000

100,000

150,000

200,000

250,000

300,00094

/Q1

95/Q

1

96/Q

1

97/Q

1

98/Q

1

99/Q

1

00/Q

1

01/Q

1

Seasonally Adjusted Real Private Investment

(Million Baht: 1988 Prices)

Fixed Price Multipliers from Expenditure Increases

GDP Multiplier

Public Sector Expenditure 0.91

Private Consumption 0.93

Private Investment 0.35

Merchandise Export 0.90

Tourism Income 1.08

Total Final Demand 0.88

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

93/Q1 94/Q1 95/Q1 96/Q1 97/Q1 98/Q1 99/Q1 00/Q1 01/Q1

Ratio of Export and Import to GDP(Goods and Services: Nominal Values)

Export Import

Short-term Economic Outlook

-2.12.31.8Tourism Income Growth (Baht) %

2002B2002A2001

2.94.24.9 (% of GDP)

3.284.985.52Current Account (Billion US$)

1.55.18.5Import Value (Baht) Growth %

1.74.9-1.6Import Value (US$) Growth %

-1.74.03.1Export Value (Baht) Growth %

-1.83.8-7.0Export Value (US$) Growth %

0.8 2.01.6Inflation

-0.51.31.6 Services

0.53.90.9 Industry

2.02.01.9 Agriculture

0.22.51.3Real GDP Growth

2002A some export and tourism recovery, 2002B declining export and tourism income

Critical Challenges

• Greater competition while being sandwiched between the lower cost and the higher technology producers

• Rapid emergence of the Information Economy, Lack of adequate education and knowledge for most of the population, and High investment cost to build up a knowledge based society

• Low fundamental competitiveness in high technology sectors (weak education and R&D systems) leading to low competitiveness rankings

Export Structure(Billion US$)

1988 1992 1996 2000

Food 6,432 9,114 12,449 10,547

Labor Intensive 4,693 9,425 11,762 13,774

Technological 2,439 8,827 20,821 30,753

Average Growth

1988-92 1992-96 1996-00

Food 9.1% 8.1% -4.1%

Labor Intensive 19.0% 5.7% 4.0%

Technological 37.9% 23.9% 10.2%

Thailand’s Rankings

2000 2001IMD 35/47 38/49 (36/47)WEFGrowth Competitiveness 30/58 33/75 (31/58)Current Competitiveness 40/58 38/75 (35/58)

Weaknesses (IMD: Bottom 10 of 49)

Government Efficiency

Central government debt - real growth 49

The educational system appropriate for a competitive economy (Survey) 47

Secondary school enrollment 47

Qualified engineers are not sufficient (Survey) 42

Technology transfer between companies and universities (Survey) 48

Weaknesses (IMD: Bottom 10 of 49)

Business Efficiency

International competence of domestic managers (Survey) 49

Transparency of financial institutions (Survey) 43

Cash flows of companies (Survey) 45

Credit flow to businesses (Survey) 44

Overall productivity: GDP (PPP) per person employed 45

Risk from relocation of production (Survey) 44

Weaknesses (IMD: Bottom 10 of 49)

Infrastructure

Availability of qualified information technology employees (Survey) 49

Inadequate new information technology for business (Survey) 48

Development of e-commerce (Survey) 47

Number of main telephone lines per 1000 inhabitants 46

Interest in science & technology by youths (Survey) 46

Science is not adequately taught in schools (Survey) 46

Total expenditure on R&D Percentage of GDP 46

Strengths (IMD: Top 10 of 49)

Economic Performance Rank

Unemployment rate Percentage of labor force 4

Employment Percentage of population 5

Cost-of-living index 8

Consumer price inflation Average annual rate 10

Strengths (IMD: Top 10 of 49)

Government EfficiencyEffective personal income tax rate (% of GDP per capita) 6Employer’s social security contribution rate (% of GDP per capita) 6Collected total tax revenues (% of GDP) 8Collected capital and property taxes (% of GDP) 9Flexibility of Labor regulations (Survey) 10

Business EfficiencyWorking hours Average number of working hours per year 10

InfrastructureNational culture is open to foreign influence (Survey) 4Discrimination does not pose a handicap in society (Survey) 8

Large Economic and Social Disparities

• By Education

• By Sector

• By Income

0%

10%

20%

30%

40%

50%

60%

70%

80%

1965 1970 1980 1990 1999

Gross Secondary Enrollment Ratio

Shares of Workforce by Education

1990 1995 2000 2005 2010

Primary and Below 83.8% 77.9% 68.0% 59.3% 50.5%

Lower Secondary 5.9% 8.9% 12.8% 15.3% 15.9%

Upper Secondary 4.7% 6.1% 8.7% 11.8% 15.5%

Tertiary 5.4% 7.0% 10.5% 13.6% 18.1%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Shares of Agriculture in GDP and Employment

GDP Employment Ratio GDP/Emp

1971 28.2% 78.9% 35.7%

1975 31.5% 73.0% 43.1%

1980 25.4% 71.0% 35.8%

1985 16.8% 68.4% 24.5%

1990 12.4% 63.5% 19.5%

1995 11.2% 52.0% 21.5%

1999 11.2% 48.6% 23.0%

Income Shares by Quintiles

1962/3 1975/6 1981 1990 1999

Richest 20% 49.8 49.3 51.5 56.5 58.2

Next Richest 20% 21.6 21.0 20.6 20.1 19.4

Middle 20% 12.1 14.0 13.4 11.9 11.4

Next Poorest 20% 8.6 9.7 9.1 7.4 7.1

Poorest 20% 7.9 6.1 5.4 4.1 3.8

Ratio Top 20% to Bottom 20% 6.3 8.1 9.5 13.9 15.2

Future Directions

• Take account of the country’s strengths and weaknesses and concentrate on activities with more permanent competitive advantages in shaping the country’s development

• Competitive in Food Based Sectors, this also promotes broad-based development

• Competitive in some Service Sectors, particularly Tourism, though management of tourism resources the key to sustainability

• Competitive as a regional production location (geographic and social advantages), though need foreign partnerships and adequate supporting policy and infrastructures

Future Directions (2)

• Also need to forge various regional and global alliances to enhance competitiveness and manage risks and volatilities

• Push for fairer and pro-poor rules for agricultural trade at the global level

• ASEAN integration critical to avoid being marginalized in a world of big players, eg. EU, NAFTA or FTAA, China, India

• East Asian integration in trade a long-term possibility, and greater East Asian monetary cooperation vital to lessen impacts of global financial volatilities

Medium Term Outlook

2003 2004 2005 2006

Real GDP Growth 3.8 4.2 4.2 4.7

Inflation Rate 1.8 1.7 1.8 2.0

Total Investment Quantity (% Increase) 5.3 7.8 7.6 7.4

Merchandise Export Growth 4.0 4.0 4.3 5.1

Merchandise Import Growth 5.5 6.6 6.7 7.0

Trade Balance 0.54 -1.19 -2.98 -4.58

% of GDP 0.4 -0.9 -2.1 -3.1

Current Account Balance 4.25 2.71 1.14 -0.11

% of GDP 3.4 2.1 0.8 -0.1