Bigger picture worries

Economists are more concerned about Thailand’s long-term prospects than the short-term slowdown in growth, writes Chiratas Nivatpumin

Economists are more concerned about Thailand’s long-term prospects than the short-term slowdown in growth.

There is little doubt that the Thai economy has slowed significantly in recent months as a result of global uncertainties and a cutback in spending by domestic companies and consumers.

Last month’s official report on the economy only confirmed what many already felt — economic growth fell 0.3% in the second quarter from the previous one, following the 1.7% quarter-onquarter decline recorded in the first three months of the year.

But leading economists speaking at a recent Bangkok Post roundtable argue that the issue of slowing growth today actually pales in contrast to the longterm challenges facing Thailand, including an ageing population, outdated infrastructure and an education system that has failed to adjust to the changing needs of society.

‘‘Yes, the first half of the year saw the economy fall into a technical recession. But it has hardly been a knockout,’’ said Songtham Pinto, director of the Bank of Thailand’s macroeconomy division.

He noted that on a year-on-year basis the economy still continued to expand by 2.8% in the second quarter, albeit sharply off from the 5.4% year-on-year growth posted in the first quarter.

‘‘2011 had the floods. In 2012, we saw higher spending on reconstruction and the first-time car buyer programme. Companies and consumers borrowed from the future to spend, and now they are pulling back. It’s actually positive,’’ Mr Songtham said.

‘‘But we shouldn’t give too much focus to the short term. I think it’s much more important to look five, 10 years down the line.’’

Pisit Puapan, director of macroeconomic analysis at the Fiscal Policy Office, agreed, adding that the economy is expected to rebound to show positive growth in the third quarter, both on a quarter-on-quarter and year-on-year basis.

Passage of the 2-trillion-baht infrastructure investment bill, now under deliberation in parliament, would offer a significant boon for the economy by boosting public investment in transport infrastructure to ultimately help reduce logistics costs and increase efficiency across the economy.

If the bill fails, either in parliament or in the courts, Mr Pisit said ‘‘Plan B’’ would be to finance the projects most ready for implementation immediately through overseas borrowing under the existing annual budget.

Sutapa Amornvivat, chief economist at the Economic Intelligence Center of Siam Commercial Bank, also agreed that 2013 may ultimately prove to be a ‘‘shortterm blip’’ in terms of growth.

She expressed concern, however, about household debt figures, particularly among the poor.

‘‘In 2009, among low-income households, out of every 100 baht in income, 45 baht went to pay debt. Now the figure has risen to 62%,’’ Ms Sutapa said.

A shift towards further deleveraging could prove a concern not just for the economy but social stability, she said, given the weak finances of low-income households.

Paiboon Ponsuwanna, a director of the Thai National Shippers’ Council, said the signs have been clear for months in the private sector that the economy has slowed.

Sluggish growth, rising costs and falling profits have already led businesses to cut back on spending, potentially creating a negative feedback loop as consumption declines.

‘‘The private sector is clearly seeing a slowdown. As profits decline, companies cut back on research and development (R&D) spending and bonuses,’’ Mr Paiboon said.

‘‘Lower bonuses and overtime spending in turn hits workers and domestic consumption. And with lower profits, who will invest in innovation for the future?’’

Mr Paiboon said that while fourthquarter production should pick up due to seasonal factors, few companies are expecting windfall orders, given that the slow pace of recovery in the US and Japanese markets mid-year means that inventory levels will remain high.

Labour mismatches

Mr Songtham said that, from a broad perspective, Thailand’s economy is relatively stable, with US$200 billion in foreign reserves, only a slight current account deficit and a stable financial sector.

Unemployment is near non-existent. ‘‘Those who want to work can,’’ he said.

But while one would think plentiful jobs would be the hallmark of a healthy economy, the reality is much different.

‘‘The question is where do we want to grow in the future? Pre-1997, we saw annual growth of 8%. How? In part by bringing workers into the formal economy,’’ Mr Songtham said.

‘‘Now maintaining growth of just 4% will be difficult. We need to address the labour shortage by boosting productivity and addressing the flaws in the education system.’’

The relatively high amount of funds that goes to education has failed to deliver value, Mr Songtham suggested, as there is a clear mismatch between what the system teaches and what is needed by the private sector.

Shortages of vocational and factory workers in part reflects the trend for workers to eschew industry in favour of agriculture, a reversal of the trend seen over the past several decades of industrialisation and driven by the distortionary impact of farm price subsidy programmes.

Mr Paiboon agreed that Thailand’s education system has mostly failed to truly educate the country’s citizens.

‘‘A bachelor’s degree doesn’t mean you are smart. We lack a culture of lifelong learning. Our workers sit in a factory pressing buttons all day, leave and buy food in their soi and then go to sleep . . . How will we ever compete with Malaysia?’’ he asked rhetorically.

‘‘I also see university graduates in modern trade outlets scanning bar codes. And they are satisfied. The economy may be moving towards a service economy. But we’re not ready and are still stuck in an agricultural-industrial mentality.’’

Ms Sutapa agreed that current unem- ployment levels are ‘‘very scary’’ and akin to a factory line running at full production capacity with little room to manoeuvre.

She said it is unlikely that the creation of the Asean Economic Community in 2015 will alleviate the pressure — indeed, it could have the opposite effect, with greater opportunities for skilled Thai workers to seek better jobs across the region.

Most Thai companies still maintain a mindset that is closed to employing foreigners, Ms Sutapa said. And despite moves to liberalise the flow of workers, barriers remain, such as requiring doctors to sit Thai-language exams in order to be licensed to practise in the country, potentially constraining Thailand’s potential to grow as a medical and wellness destination.

Lack of vision, lack of will

If competitiveness in the 21st century is measured by creativity, innovation and knowledge, Thailand has much to do if it aspires to continue to grow.

‘‘R&D investment accounts for just 0.21% of gross domestic product. Compare that with 3.7% for Korea, 3% for Japan and 2.9% for the US,’’ said Mr Paiboon.

‘‘These are the two major issues for the future — skilled labour and R&D. . . . The question is, will policymakers start to focus on the economic problems or will it just be politics as usual?’’

Ms Sutapa said relatively easy gains could be made through further capitalising on the rapid growth of Thailand’s neighbours.

Border trade now accounts for as much as 70% of the country’s total trade volume, and it looks to rise as Cambodia, Laos, Myanmar and Vietnam (CLMV) continue to industrialise.

‘‘We are now a high-cost labour country. And our equipment is outdated, purchased when we were still had low labour costs,’’ Ms Sutapa said.

‘‘The CLMV countries are a potential market for this equipment, if the right matching mechanism existed. And further growth in border trade could be made by facilitating payments and customs procedures — this is low-hanging fruit.’’

Future development, however, will require focus on long-term issues, Ms Sutapa said.

‘‘There is a lack of awareness and a short-term time horizon. Take education. Education and learning are much different. But we lack determination to execute a long-term vision,’’ she said.

Mr Pisit agreed that a clear vision is needed for the future. ‘‘Competition will only increase. How will we position ourselves as an economy? What are our competitive strengths?’’

Mr Songtham suggested that key performance indicators need to shift from short-term metrics such as quarterly growth figures to the implementation of long-term strategies.

The current slowdown in part ‘‘is the price we pay for failing to address our long-term problems’’ such as policy uncertainty, inadequate infrastructure investment and excessive bureaucracy, he said.

‘‘We are not alone in the world. The economy will grow if we can sell what we produce. It’s that simple,’’ Mr Songtham said with a shrug.

‘‘There are no easy solutions, and these problems won’t be solved by any one government. Yes, politics deserves some blame. But we must also blame ourselves. Everyone must play their part.’’