Thailand's Policy Challenges

• Author: Deunden Nikomborirak
• Date: 01 July 2020
• Published date: 01 July 2020
• DOI: http://doi.org/10.1111/aepr.12293

Thailand’s Policy Challenges

Deunden NIKOMBORIRAK†

Thailand Development Research Institute

ABSTRACT

Thailand’s real gross domestic product growth has fallen to a permanently lower trend, making

it the worst performer in the Southeastern Asian region. The export sector, the country’s long-

standing growth engine, has sputtered due to the declining competitiveness of the manufacturing

sector. Chronic political instability during the last two decades has resulted in the adoption of

short-sighted policies, in particular, populist policies designed specifically to garner votes rather

than improve the long-term productivity of the business sector. The military coup was expected

to restore political stability and end costly populist policies introduced by elected civil govern-

ments. Unfortunately, as the military government develops its long-term political aspirations, it,

too, seeks the assistance of populist policies to ensure its political success. Thailand has promul-

gated laws and regulations to ensure fiscal discipline, but it has yet to be seen whether the letter

of the law can help prevent such populist policies in practice.

Key words: economic reform, fiscal sustainability, middle-income trap, populist policy, rice-

pledging scheme, Thailand

JEL codes: H1, H3, P16, P18

1. The State of the Thai Economy and its Challenges

Since 2005, growth of Thailand’s real gross domestic product (GDP) has fallen to a per-

manently lower trend, making it the worst performer among the major Association of

Southeast Asian Nations (ASEAN) countries (Indonesia, Malaysia, the Philippines,

Thailand, and Vietnam) with an annual GDP growth rate below 4%, while the GDP

growth rate of the other four member countries ranged from 4% to 7%. According to

Thailand Development Research Institute (TDRI) (2018), this is because the country’s

I would like to thank Chalongphob Sussangkarn for his valuable advice during the drafting stage

of this paper. I also would like to thank Akio Egawa and Hiroyuki Taguchi, the designated dis-

cussants of this paper, and the conference participants that contributed during the floor discus-

sion for their helpful comments. My special thanks are extended to Colin McKenzie for his hard

work during the process of revising the paper. Finally, I am particularly grateful for the financial

support provided by the Japan Center for Economic Research (JCER).

†Correspondence: Deunden Nikomborirak, Thailand Development Research Institute, 565 Soi

Ramkamhaeng 39, Wangthongland District, Bangkok 10310, Thailand. Email: deunden@tdri.or.th

The Editors regret to announce that the author died suddenly in an accident after submitting the

publication version of this paper, but beforeit was actually published.

284 © 2019 Japan Center for Economic Research

doi: 10.1111/aepr.12293 Asian Economic Policy Review (2020) 15, 284–300

main economic engine, the export sector, is sputtering due to declining competitiveness

as a result of rising wages, bureaucratic red tape, protectionist policies, and a lack of

research and development (R&D) and innovation as well as an increasingly grim trade

environment as a result of economic stagnation in Thailand’s major trading partners

such as Japan and the on-going trade war between the USA and China. The growth of

exports of goods lagged behind GDP growth during the period 2012–2016. However,

services exports surged. The prospect of a recurrence of the pre-2005 stellar GDP growth

rates in the near future is bleak as foreign direct investment (FDI) inflows have also

slowed down considerably. Thailand is also no longer the main destination for foreign

investors looking for opportunities in ASEAN, rather, they look to Vietnam and Indone-

sia. In 2017, FDI inflows into Thailand were US$9.1 billion, slightly lower than those of

Malaysia and the Philippines that are much smaller in economic size and way below the

US$23 billion for Indonesia and US$14 billion for Vietnam. These economic indicators

paint a rather gloomy scenario for the Thai economy going forward.

The emerging growth engine of the Thai economy has been tourism. Travel

receipts contributed to the sharp improvement in the service account balance from a

chronic deficit to a continuous and rising surplus. In 2010, Thailand’s service account

was in deficit to the tune of roughly US$9 billion with tourism receipts of US12 billion.

In 2018, these figures were a surplus of US$22 billion and US$92 billion, respectively.

Although the dramatic surge in the number of international tourists arriving in

Thailand from 16 million in 2010 to 38 million in 2018 has been a boon to the Thai

economy, tourism income is extremely volatile especially when about a third of the vis-

itors come from a single country, China. The economic slowdown in China will cer-

tainly undermine the prospects of continuing spectacular growth seen during the last

few years. Therefore, Thailand is in dire need to find a new growth driver that can

ensure its long-run economic expansion.

Unlike South Korea or Chinese Taipei, Thailand has not been able to escape the

“middle-income trap.”The term “middle-income trap”was first used by Gill and

Kharas (2007), and is commonly defined as a situation in which a country successful

graduated from a low-income to a middle-income economy, but has no prospect of

becoming an advanced one because the old model of development no longer works.

The trap can be identified in either relative or absolute terms. Jitsuchon (2012) shows

that the 11 year moving average of economic growth of the Thai economy fell from its

peak of 9% in 1991 to 4% in 2011. As a result, the per capital income gap between

Thailand and the USA widened rather than narrowed during the period 1960 to 2008.

In absolute terms, Jitsuchon (2012) shows that the per capital income of South Korea

continued on a steep rise from the 1980s reaching US$25,000 (in 2005 terms valued at

purchasing power parity rates) while that of Thailand remained well under US$10,000.

Thailand has been unable to attain higher productivity through technological or

skills upgrading. According to Sussangkarn and Jitsuchon (2009), past economic

growth was generated by productivity gains resulting from the movement of workers

from the low-productivity agricultural sector to the higher productivity manufacturing

sector that is more capital intensive. But such gains from resource reallocation are

Deunden Nikomborirak Thailand’s Policy Challenges

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