Friday, April 27, 2007

Deconstructing Thanong: Worries about Thailand's Economic Competition


Thailand's growth worsening as competitors reap the benefits

Thanong Khanthong

The Nation

Thailand is now trailing all other countries in the region in terms of economic growth.

This is a worrying trend and it has been occurring over the past two to three years. If this continues, emerging nations will soon catch up with Thailand, with higher living standards.

I think the trend started recently. Overall, Thaksin's economic record was fairly good. Surayud's economic polices have been a failure.

To make matters worse, Thailand is now grappling with political turmoil. It will take another year before things return to normal. It will be another lost year. In the meantime, Thailand is getting bad press. Business and investor sentiment concerning Thailand is very poor. They are saying that if Thailand does not put its house in order soon, investment capital will go elsewhere.

Everything is true and the bad press Thailand is receiving is well-deserved. But I don't think we are at a crisis point yet. Thailand is not in a recession and it has an enviable employment rate.

Let's take a look at the Asian Development Bank's latest report. The report shows Thailand has the slowest projected growth rate in the region. The Kingdom is expected to register economic growth of 4 per cent this year and 5 per cent in 2008. In Malaysia, however, those numbers are 5.4 per cent and 5.7 per cent respectively. Indonesia is also doing better with 6 per cent and 6.3 per cent respectively. The Philippines is expecting growth of 5.4 per cent and 5.7 per cent respectively, compared with 6 per cent and 5.5 per cent for Singapore, 5.4 per cent and 5.2 per cent for Hong Kong. But keep an eye on Vietnam. This star of the region is expected to grow by 8.3 per cent in 2007 and 8.5 per cent in 2008. It is taking in a lot of investments - investments that used to pour into Thailand in the late 1980s and early 1990s. India is also on the rise, expecting growth of 8 per cent this year and 8.3 per cent next year. The report says that China will continue to defy the economic bubble theory with projected growth rates of 10 per cent in 2007 and 9.8 per cent next year.

Of all the these economies, Thailand had the biggest head start in the 1850's. Yet it is still a 3rd world country instead of being a powerhouse like Korea or Japan. And now all the neighboring countries that were held back because of war and socialism are taking off. What lesson can Thailand learn from this? Liberalization and rule of law are good; socialism, crony capitalism and corruption are bad. Thailand's problem is not economic. It is political, because so many conglomerates, bureaucrats and banks only work for themselves and their allies rather than for the greater good.

In order to re-emerge, Thailand will need to attract a huge amount of foreign investment or undergo massive restructuring. But there are no signs that we have a game plan on how to position ourselves in the next 10 years. At the moment, the export sector and revenues from tourism are the only engines helping to prop up Thailand. Domestic consumption, investment and government spending are sluggish.

There is a vision problem. There is an incompetence problem. There is a horrible bureaucracy problem. There is a corporate finance problem. There is a tax problem. There is a service problem. It is not difficult to reform these problems, but those with political power don't want to give up their feudal privileges nor do they want to empower people to take over their own economic destinies.

Looking back, Thailand and other Southeast Asian countries benefited from a global currency realignment following the Plaza Accord agreement in 1985. That set the stage for an appreciation of the yen. This forced Japanese companies to relocate their operations overseas to remain competitive. Japanese manufacturers chose Thailand and other Southeast Asian nations for their manufacturing bases.

At that time, countries like Russia, China and India had not yet opened up their countries for investment, so the capital flooded into Thailand and other Southeast Asian nations, helping to create an Asian miracle story. Thailand has been an export-led nation ever since, following the East Asian Economic Model. Economic and financial liberalisation followed suit. Investments and exports held the key to driving growth.

But matters took a sharp turn in 1991 and 1992 when Russia, India and China started to embrace an open-door policy to welcome foreign investment. China has been most successful in attracting foreign-direct investment. Foreign companies realised the huge potential of China's gigantic domestic market apart from its cheap labour for export manufacturing.

The problem is easy to diagnosis in Thailand. The government bureaucrats and the capitalist elite don't to open up the economy because they are incapable of competing. The government has been protecting them from real competition for decades. In other words, Thailand doesn't really have an open door policy that says "welcome to Thailand, please do business, and keep your profits." Instead, it has the policy of "welcome to Thailand, please do business until we can screw you out of all your money, snicker, snicker, snicker, then go home."

A recent article by Merrill Lynch, "The Gross Prophet" (April 12, 2007), is interesting. It compares the challenges facing Thailand and Malaysia as they go forward. Both face the challenges of how to maintain their attractiveness as investment destinations while global investors and companies have abundant alternatives.

"Malaysia and Thailand were net beneficiaries during the decade the transitional economies needed to progress up the learning curve, as early investors and trading partners. Then in the last five years, as the transitional economies became emerging markets, they allowed world economic growth to remain resilient at 5 per cent a year, despite lacklustre growth in the developed economies. This was good for Malaysia and Thailand, as they are export-dominated economies, which are also rich in natural resources.

Why is Thanong lumping Malaysia with Thailand? In terms off service, transportation, liberalization, political stability, and government policy towards foreign investors, Malaysia beats Thailand. On the other hand, Thailand beats Indonesia and the Philippines. But Thanong is right. Before Thailand was the king of Southeast Asia, but if the Philippines and Indonesia ever get their acts together, along with the rise of Vietnam, Thailand will be in big trouble,

"But going forward the bad news is, these (transitional and now emerging) countries are now competing against Malaysia and Thailand for trade, commerce and investment. Some of the new players have enormous populations (China and India it goes without saying, but also Pakistan, Bangladesh and Vietnam). Others have small populations but untapped natural resources that they are keen to exploit (Kazakhstan and Mongolia)." Already, Malaysia and Thailand have been overshadowed by the excitement of these new places. Their stock markets have received less weighting as a percentage in the Morgan Stanley Capital International Index (MSCI). Malaysia enjoyed a peak in May 1995, with a weighting in the MSCI of 16.2. Now its weighting is 4.5 per cent. Thailand has faced a similar situation, with an MSCI weighting of 10.1 per cent in June 1995 and now 2.2 per cent. This implies that other emerging markets have been taking away the investment that would have otherwise gone to Malaysia and Thailand.

Compete or die.

The two neighbours need to do something to improve their attractiveness, as global changes unfold before their eyes. Unfortunately, Thailand has not yet started to rethink its future or how it plans to compete in the years ahead. Singapore laid down its economic plan for the global economy four or five years ago. Malaysia has also taken several steps to improve its attractiveness. Vietnam has done an excellent job in opening up. But Thailand - facing an ongoing political crisis - has to pull itself together quickly and mobilise all its resources in order to make sure it's going in the right direction.

Thailand has all the potential in the world. It is truly the suvarnaphumi. But the bureaucracy, the military and the anti-foreigner capitalist elite want to protect their interests. The last thing they want is Thailand to liberalize its economy and political system. They want to keep the poor disenfranchised, stupid and powerless.

But Thanong will never talk about this, because he is part of the Thai elite that wants to maintain its feudal, social and economic privileges.


Anonymous said...

You say, "Of all the these economies, Thailand had the biggest head start in the 1850's," based on what evidence? Do you mean because Siam was an independent country and the Bowring treating brought trade and prosperity? I think it benefited only a tiny percentage, specifically members of the ruling/royal family. Compare this to Singapore, say, where free trade benefited a wider base people. Politically, it would seem that Siam also had a head start when absolute monarchy was abolished, equivalent to independence for the neighbors. Unfortunately, we'll still stuck where we were in 1932 while several neighbors have forged ahead. I agree with you, if we had half competant leaders we could be a great country in this region.

Anonymous said...

The problem is that the leaders are inevitably drawn from the people. The people are hampered by a Victorian education systm and a restrictive culture which actively seeks to prevent the development of excellence, instead focusing on the patronage system where age and status (which may well have been bought) are respected and not worth. It is the form over substance problem again.

I heard that when a private University in the Philipines went bust, one of the last duties performed was to come here and sell bogus doctorates to numerous Thai parliamentarians. I cant judge the truth of this of course but the very fact that it is given any credence at all speaks volumes for the Thai approach to life.

And it isnt going to change any time soon.