Thailand and the middle income trapPeter Yu Chi Wong (52649136)

Despite Thailand’s many economic successes, how and why did Thailandfail to upgrade its industrialisation, leading it to be ‘stuck in the middleincome trap.’

IntroductionOver the past few decades, Thailand has managed toachieve high in economic realm. For instance, the WorldBank announced that Thailand had moved upwardly from alower-middle-income category to an upper-income one in2011 (Jitsuchon, 2012:13), ranking as the second largesteconomy in Southeast Asia with a GDP (PPP) of USD$674.3billion (CIA 2013). In spite of the economic honours, anumber of scholars conclude that Thailand is in factstuck in a ‘middle income trap’ (Warr 2011; Sombun 2012 &Jitsuchon, 2012). In order to investigate the issue, thisessay would first address how Thailand was struck in themiddle income trap and then analyse why such occurs inThai economy.

I argue that Thailand’s falling into the middle incometrap is a result of failures of policy-makers in thedevelopmental state. With ineffective economic policiesin various aspects, factors like (1) labour, (2) humancapital, (3) natural resource, (4) macro-economic policyproblems, (5) economic structure problems and (6)Japanese foreign investment have all been contributive tothe current Thai economic development.

How?Generally speaking, ‘middle income trap’ refers to that‘once a country reaches middle-income levels the growthrate often declines and graduation from middle-income tohigher-income levels stalls’ (Warr 2011).

The concept can be applied to Thai economy both

absolutely and relatively. In absolute terms, Figure 1displays that only a few countries like Japan and SouthKorea which started their development process in 1950swere successful in raising their per capita incomesteadily while other states including the middle-incomestate Thailand (circled in blue) failed to do so. Itsuggests Thailand is in the ‘middle income trap’ ‘withoutbecoming an advanced, rich country’ (Jitsuchon 2012:14).In relative terms, Figure 2 showcases when economicperformance is measured against American economy, only ahandful of countries such as Japan, South Korea, Taiwanand Hong Kong managed to close the gap with the UnitedStates in 1960 and 2008 in a sense that these countriessuccessfully rose from being middle-income countries inthe 1960 to more or less equally rich as America in 2008(Jitsuchon 2012:14). Others like Thailand (in bluecircle) still remain in the middle-income area even aftera 48-year-development, being struck into the middleincome trap.

Figure 1

Source: Adapted from Jitsuchon 2012

Figure 2

Source: Adapted from Jitsuchon 2012

Why?‘Thailand is likely to have fallen into the trap around1994-1995’ (Jitsuchon 2012:14). Undoubtedly there areplentiful factors leading Thai economy to have such adevelopment. As abovementioned, all of these factors canbe viewed as failures of policy-makers in the Thaidevelopmental state.Labour Thailand has experienced a shortfall of skilled,semiskilled and unskilled labours. Labour shortage hasoccurred in Thailand for many years (Jitsuchon 2012:15).Some recent figures can help us understand the severityof the problem. For skilled workers, according to theEconomist Intelligence Unit, in 2007, ‘20% of allmanufacturing firms reported shortages of professionalworkers’ while skilled production workers shortages werereportedly even higher by an average 30% of manufacturingfirms in Thailand (2012:42). With reference tosemiskilled and unskilled labours, official statisticssuggests that only 32,803 middle school graduates enteredthe labour market in 2012, which insufficiently met thedemands (Ministry of Labour of Thailand 2013).

Such shortages have caused Thailand to be struck in themiddle income trap. Due to inadequate numbers of workers,

jobs cannot be fully filled and performed. As a result,operations of enterprises would first be hindered andthen developments of the entire Thai economy would beslowed down, failing to upgrade the industrialisationprocess. Without appropriately new policies from thestate to tackle the problem, Thailand is finally struckinto the middle income trap.

Human CapitalBecause of little emphasis put on human capital, Thailandlacks sufficiently qualified manpower to assist inupgrading its economy, thus still being trapped in themiddle income area. Firstly, low-skilled workers tend toseek for public training opportunities but due to thenature of those government-organised courses that theyare not driven by demand and supply (Jitsuchon 2012:16),workers do not obtain enough training from the publicsector, becoming unsuccessful in upgrading their ownskills and knowledge for labour market, not to mentionupgrading Thai industrialisation.

Secondly, as Jimenez, Nguyen and Patrinos point out, ‘thequality of education remains an issue’ in Thailand(2012:16). Education systems in Thailand fail to ‘preparegraduates suitable for the labour market’ as graduatesare in lack of essential skills such as informationtechnology, communication and leadership for futurecareer (Jitsuchon 2012:16). With inadequate skills,graduates cannot fully contribute to theindustrialisation upgrading process, leading the countryto be struck in the middle without much upward mobility.

The third problem is the low input on research anddevelopment (R&D). In recent years Thailand has onlyspent 0.2 percent of its GDP on R&D, which is severelyinsufficient. The IMD World Competitiveness Yearbook 2013even discloses that Thailand had only 9.1 R&D personnelout of 10,000 people in 2013 (Kyaw 2014). With little

emphasis on R&D, Thailand is impossible to develop high-end and high-value-added industries like medication andairplane manufacturing, thus failing to upgrade itsindustrialisation and being trapping in the middle incomeposition.

Natural ResourcePresently there is less natural resource available fordepletion as a means of development in Thailand,hindering the country’s industrialisation upgradingprocess. Thailand has relied on natural resourcedepletion as a method of development for many years. Forinstance, under authoritarian military rule during the1960s and 1970s, major parts of Thailand's forests weretransformed to arable land (Buch-Hansen, Oksen &Prabudhanitisarn 2006:48). Nevertheless, after years ofdevelopment, ‘there are not too many such resources leftnowadays’ (Jitsuchon 2012:16). As a result, as lessrecourse available to be converted for development,economic growth would be reduced and hampered inThailand.

Macro-economic Policy ProblemsThe macro-economic policy problem that Thailand iscollecting much less tax than it should have obstructsthe country’s upgrading process. Comparing withinternational norms and standards, Thailand is‘collecting less in the way of tax than it should’(Jitsuchon 2012:16). Therefore, the Thai authorities donot have sufficient capitals to invest ininfrastructures, social welfare and educationalprogrammes that would benefit Thailand’s long-termeconomic growth. Hence tax reform is needed if Thailandis to sustain a long-term economic growth.

Moreover, it is becoming more difficult to maintainmacro-economic stability now in Thailand, posing a threatto the country’s industrialisation upgrading process.

Since the introduction of ‘managed flexible exchange ratesystem’ which is to ‘let the value of the Baht getdetermined by market forces’ in July 1997 (Tiwari2003:9), monetary stability depends on the Bank ofThailand’s formulation of policies according to‘inflation targeting’ framework (Jitsuchon 2012:16).Nonetheless, the Bank lacks high levels of credibilityand appropriate levels of independence from thegovernment to enforce such policies given the politicalinstability in Thailand nowadays. Therefore, Thai economycannot grow to become high-income country without muchmonetary stability.

Economic structure problemsProblems in economic structure likewise have an impact onthe industrialisation upgrading process in Thailand.Firstly, monopolistic power exists among state-ownedenterprises. For illustration, the PTT Public CompanyLimited is a Thai state-owned company and monopolisesextensive businesses in gas and oil across Thailand (PTTPublic Company Limited 2012), being able to become theonly Thai corporation listed in the Fortune Global 500 (CNN2014). Also, regulations prohibit full competition insome vital industries like finance and telecommunication.For instance, in telecommunication industry, the bigthree (DTAC, AIS and TRUE) almost controlled 98% of thetotal market in Thailand’s mobile service in 2007 (WorldBank 2008:83) (see Figure 3). Hence, because of themonopolistic nature in these high-value-added industries,no market competition forces these corporations toupgrade their business, leading Thai economy to betrapped in the middle income area.

Figure 3 Market Shares in Thai Mobile Services (as ofJune 2007)

Source: Adapted from World Bank 2008

Moreover, the dichotomous nature in private sector alsohinders Thailand’s upward mobility to become a high-income country. There is only limited number of largecorporations competing in worldwide markets and plentifulsmall and medium-sized firms are locked into low level ofinnovation (Jitsuchon 2012:16). Not surprisingly thereare no known major products from Thai companies competingin the world markets while SMEs lack capabilities ofbeing providers of global products. As a result, Thailandhas failed to attract both public and private investment,thus still being in the middle income position.

Japanese Foreign InvestmentThe decrease of Japanese foreign direct investment (FDI)has also been contributive to Thailand’s middle-incometrap. Japanese FDI has been integral to the economicdevelopment, especially the manufacturing industry ofThailand as evidenced that Thailand had roughly occupied40% of Japan’s total FDI share in 2005-2009 (Hamanaka2011:351) (see Figure 4). Since 1980s, Thailand hadattracted Japanese ‘FDI in manufacturing, as they (Thais)could provide the low-wage labor necessary forundertaking labor-intensive manufacturing processes’(Urata 1993:281). Therefore, Thailand has been praised asthe ‘Detroit of Asia’ (Thailand Board of Investment2012). Nonetheless, Thailand’s share in Japanese FDI hasbeen declining over the last few years, partly due to the

political instability there (Hamanaka 2011:360). Thisresults in the reduction of Thailand’s motor vehicleproduction units of passenger cars from 554,267 in 2010to 537,987 in 2011 and of commercial cars from 24,278 in2010 to 20,608 in 2011 (Thailand Board of Investment2012). Without the support of Japanese FDI, Thailandfinds it ever more difficult to sustain long-termeconomic growth, being trapped in the middle incomestatus.

Figure 4 Japan’s FDI in Manufacturing Sector in ASEAN byCountry

Source: Adapted from Hamanaka 2011

SummaryAll in all, despite its economic achievements, Thailandhas been struck in the middle trap for many years sincethe mid-1990s. All the factors, (1) labour, (2) humancapital, (3) natural resource, (4) macro-economic policyproblems, (5) economic structure problems and (6)Japanese foreign investment have been playing a key rolein such a development in Thai economy. It is undeniablethat policy-makers in the Thai developmental state havefailed to introduce newly appropriate polices in thesesix spheres to tackle the situation, which eventually ledthe country to be trapped in the middle. In order for

Thailand to get rid of the trap, it is vitally necessaryfor introduction of new polices.

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