Don’t neglect the Ministry of Industry
Turn on the news. There is nothing much to watch except for Thai politics and the formation of the new cabinet. First, it is about the ministerial posts to be allocated to each coalition party. Then, the allocation of the posts within the parties. Finally, the specific names for each position.
Even though Prime Minister Prayut Chano-cha has indicated that all the appointments and the names have already been finalised, I don’t think anything is final until it is officially announced.
However, that is not my concern. My worry is that politicians are focusing on the wrong ministries, namely the Agriculture and Cooperatives Ministry and the Transport Ministry. The latter, of course, controls all the mega infrastructure projects in this country, and it is allocated large amounts of government budget. Definitely, this is an “A+ grade” ministry for politicians.
Although the Ministry of Agriculture and Cooperatives’ budget is half the size of the Ministry of Transport’s, it involves 15.6 million farmers or, to politicians, 15.6 million voters. So it is certainly another A+ grade ministry on any politician’s list. If the desire is to wield influence over large budgets or voters, it is undeniable that those two ministries are the most important.
But from an economic perspective, the most important one must be the Ministry of Industry. Why? Because the impact of industrial policy is far greater on the economy than the two other A+ ministries.
Agricultural output accounts for 6.3% of total GDP, but industrial output makes up a whopping 27.4% portion of GDP. In other words, in the Thai economy, the industrial sector is 4.3 times larger than the agricultural sector. If one wants to meaningfully stimulate the economy, one must turn to industrial output, not agricultural output. Raising industrial output by 10% would get you a 2.74% increase in GDP while doing the same thing for the agricultural sector would get merely a 0.63% increase in GDP. Need I say more?
What is the size of the Ministry of Transport’s budget? It is exactly 183.75 billion baht in the 2019 fiscal budget, equivalent to 1.13% of GDP. If anyone thinks that 1.13% of GDP budget can move the whole economy, then they could not be more wrong. But to politicians, such amounts of budget are large enough to put the Ministry of Transport at the top of the list. Of course, one could argue that the total infrastructure development budget is trillions of baht. True. But over how many years? On an annual basis, the amount is what you have seen in the ministry’s budget.
Economics-wise, there is no doubt that the No.1 ministry must be the Ministry of
Industry as it directly concerns almost 30% of the economy. But that is not the view of the government. The Ministry of Transport is allocated 6.1% of the fiscal budget to spend and the Ministry of Agriculture and Cooperatives gets a 3.6% share of the fiscal budget. What about the Ministry of Industry which guides and regulates 30% of the entire economy? The 2019 budget allocation for the Ministry of Industry is 5.06 billion baht, or 0.2% of the budget. Moreover, its 2019 budget is 10.4% less than that in 2018. No wonder this ministry is never on the top of the list for the most-wanted ministries. Sad for the country, indeed.
I have to say that I am not an industrial sector expert. But looking at economic data provided by the Bank of Thailand, I notice problems. The first one is the low capacity utilisation of many industrial sub-sectors. It will be difficult for any factory to stay in business if it utilises less than half of its capacity. Rubber products, garments, base metals, and furniture manufacturers all fall below the critical 50% capacity utilisation level. Closures of these factories seem to be inevitable. Many more, including leading industries, utilise less than 60% of their capacity. Furthermore, export-oriented industries have been taking hard hits in recent months from the weakening world economy and intense competition, not to mention the sharp appreciation of the baht.
A lack of investment to improve production technology and products is also a major problem. This is especially true given a fastchanging world where new products hit the market on a daily basis and internet connections make marketing very competitive. While Thailand is focusing on politics and other things, our competitors are miles ahead.
It is a major concern whether our industrial sector will be able to catch up with the fastchanging world. A case in point is the hard disk drive industry. Thailand’s hard disk production facilities can only produce with hard disk drive (HDD) technology, but the world is moving towards solid state drive (SSD) technology, which our country does not have, or rather, does not invest in. Not surprisingly, the capacity utilisation of the computer component sector dropped from being at almost full capacity to only 70% in recent months. And the number is still falling.
Facing all these critical challenges the Ministry of Industry still gets only a 0.2% budget allocation. Things can only get worse for the sector.
The industrial sector is not only important for the economy, but it is also of grave importance for saving the agricultural sector as it provides a key source of funds.
Whatever form it may take, the government essentially has to subsidise crop prices, and that needs a large amount of money. With the weakening industrial sector, there will never be enough funding to prop up crop prices. Direct industrial output or income accounts for 30% of the whole economy, but indirect income, such as wages, utility payments and rent, could easily account for another 30% of GDP.
In total, 60% of the country’s income — and taxes — comes from the industrial sector.
If the politicians do not save the industrial sector, they can pretty much forget the 15.6 million voters of the farming sector.
The Thai economy is too small to support its own industrial sector. The word “support” applies to both the investment side as well as the demand side. It is inevitable that the industrial sector will have to heavily rely on foreign investors and foreign markets.
As I said, the world is changing fast and the competition, for both the investments and demand, is fierce. If the new government does not change its mindset and refocus its economic policy from building infrastructure and propping up crop prices to restructuring the industrial sector, one can pretty much forget about economic prosperity in Thailand.