Thailand?s Difficulties in Moving towards a High-Income Economy

Source : http://wwwnc.cdc.gov/travel/images/map-thailand.png

Recently, I had an opportunity to deliver a lecture on ?Thailand?s Economic Strategy towards a High-Income Economy? to new investors. I assume readers who are interested in national development issue may probably have some interest in my lecture?s content as well. Therefore, I have selected some parts of the lecture to share with readers in this article.

Due to Asia?s rapid and constant economic expansion at present, a question arises as to whether Asia will be able to maintain its growth rate in the future, or whether it will fall into the middle income trap similar to what has happened in Latin America in the past.

The middle income trap is a concept which explains that the change from a low-income country to a middle-income country is easier than the change from a middle-income country to a high-income country. This is because a low-income country will benefit from low wages which attracts investments from labor-intensive industries to establish production bases for export. As a result, the employment rate and the population?s income increase.

Nevertheless, when income rates or wages increase, the ability to compete of labor-intensive industries starts to decline. The economic structure will begin to adapt itself into the production with higher technologies, which is not sufficient to escape from the middle income trap because industries are still unable to move towards the upstream (research, development and design) and the downstream(marketing and branding) directions in the supply chain which have higher added value.

This article will reflect the causes of Thailand?s difficulties in moving towards a high-income economy.

Export industry is only OEM

Thailand?s economy has been developing continually from being an agricultural economy to one which is industrial which uses intense labor for export and has developed into a high-tech industrial economy. This change can be noticed from the fact that exports from Thailand have become products with higher added value. The share from the export of low added value products like agricultural and fishery products has the tendency to decline while the share from the export of high-technology products tends to increase.

However, major export industries are only OEM?s (Original Equipment Manufacturers). When considering Stan Shih Smiling Curve (Picture 1), manufacturing is the activity with the lowest added value in the supply chain. Thai industries are still unable to develop activities with higher added value, i.e., those in the upstream supply chain (research, development and design) and those in the downstream supply chain (marketing and branding). This is because OEM?s are under risk of having their contracts terminated by brand owners who might turn to hire other countries with greater advantages in production.

                    The automotive industry is one  such example. Thailand is the biggest production base of the automotive industry in ASEAN thanks to the government?s policy to promote investments in this industry. Consequently, the domestic automotive market is massive. Also, the high-rate taxation of imported cars causes leading car manufacturers to establish their production bases in Thailand. Besides, there are a great variety of supporting industries such as automotive parts, tyres, accessories, etc. Nevertheless, most of the automotive factories mainly deal with the composition of car parts.

Another example is the electric and electronic equipment industry (EEE). Thailand?s value of the EEE export totalled as much as 24% of all exports in 2011 and ranked the 13^th in the global export of electric and electronic equipments. The EEE industry in Thailand is part of the world?s supply chain.

Even so, this industry mostly relies on foreign investments which use Thailand as the production base for export. The share of foreign investors in the EEE industry equaled 24.9%of all investors in 2011. Besides, the EEE industry in Thailand mostly comprises downstream OEM?s which rely on technologies, designs and purchasing orders from overseas. The import content of the production process is quite high; for example, computer products including computer parts and equipments which are mostly considered downstream electronic items.

However, the electronic industry has its structure adjusted towards the midstream direction, from computer products including computer parts and equipments to printed circuit board, semiconductor and integrated circuit which belong to the production chain of other high-technology products apart from computers.

Picture 1 The Stan Shih Smiling Curve

Dependence on foreign technologies

High-technology industries in Thailand are mostly foreign investments. Multinational corporations have explicitly entered into Thailand. According to a survey in 2005, it was discovered that foreign companies held their shares in various businesses as follows: 65.07% in technology and communication businesses; 40.86% in service businesses(9 branches); 82% in mobile service businesses and 75% in hypermarket businesses.

Even if the investments from multinational corporations have several advantages as they cause the economy to expand and contribute to higher rate of employment which leads to the adjustment of production structure towards the use of higher level of technologies, the challenging issue for the Thai economy is  allowing Thai people to gain technological knowledge from overseas, to enable Thai entrepreneurs to develop their own technologies and to be able to export those technologies to foreign countries. 

This is because, in the past, Thailand lacked the ability to develop its own technologies due to the fact that Thailand had very low investment  in research and development(R&D). Thailand?s expense on R&D was only 0.21% of GDP. Most of the R&D was from the government sector, while the private sector had a very limited number of researchers.

On the other hand, the expense on R&D of developed countries in Asia was more than 2% of GDP since leading countries in Asia realized the necessity of the development of productivity and innovation. The expense of R&D and the patent licensing in Asia rose rapidly. Globally, China?s R&D ranks the 2^nd after the USA. Japan?s R&D ranks the 3^rd while South Korea spends more on R&D.

If Thailand still does not realize the importance of R&D, the country will not be able to catch up with high-income countries while countries with a similar level of income such as  China and Malaysia are developing and advancing. Eventually, Thailand will lack the capacity to compete with countries whose economy is still emerging. Furthermore, Thailand is still short of R&D?s supporting factors such as highly knowledgeable and skilled personnel; the basic structure which supports investment and the incubation of research; development and product design industries as well as the knowledge from research and development both from the government and private sectors. Additionally, the institution for the protection of intellectual properties is also not strong.

These factors are only parts of the obstacles in the development of the high-income economy that Thailand must urgently overcome and pay attention to in order not to fall into the trap. There are also many other obstacles which I would like to mention in the next articles.

Kriengsak Chareonwongsak
Senior Fellow at Harvard University?s Center of Business and Government.
kriengsak@kriengsak.com, http://www.kriengsak.com