Thailand faces a challenge to beat the middle-income trap

Recently, the Thai government announced its country development strategies that cover four areas: overcoming the "middle-income trap"; promoting inclusive growth; achieving a "green" economy; and improving internal processes.

What I find most interesting and challenging for Thailand in the coming years is the first strategy: how to lift our economy out of lower-middle income status toward that of a higher-income economy. Indeed, the middle-income trap is generally defined as an economic development situation in which a country that has attained a certain income (due to given advantages such as cheap labour and natural resources) gets stuck at that level without graduating toward high-income status.

The evolution of the middle-income trap is that countries can rather easily develop from their low-income economic status toward middle income using an excess cheap labour supply and natural resources. However, once they have achieved the middle-income level, they find themselves unable to compete further in export markets with lower-cost producers elsewhere (the so-called "nutcracker effect") and lack the innovation necessary for achieving higher value added production. Thus, they will always find themselves behind, and fail to catch up with advanced economies in higher-value products.

Typically, the World Bank finds that countries trapped at middle-income level often have the following characteristics: low investment ratios; slow manufacturing growth; limited industrial diversification; and poor labour market conditions.

The famous economics professor Paul Krugman eloquently summarised this phenomenon back in 1994 as, "Mere increases in inputs, without an increase in the efficiency with which those inputs are used - investing in more machinery and infrastructure - must run into diminishing returns; input-driven growth is inevitably limited."

The World Bank cites as classic examples of the middle-income trap South Africa and Brazil, which have languished for decades in what is called the "middle income" range (about US$1,000 to $12,000 gross income per person). Thailand now records income per capita at $5,395, which means we are still a long way from getting out of middle-income status.

Now, the Thai government intends to upgrade the Thai economy to move up the "value chain" through four policy frameworks: developing future industries and maintaining existing ones (i.e. the "kitchen of the world", auto production, medical services, biomaterials, etc); increasing the competitiveness of SMEs and the OTOP programme; promoting land zoning and efficient uses; and investing in infrastructure and logistics network.

The fourth policy will start the implementation stage within this year as the Bt2.27 trillion logistics investment programme over the next seven years (2013-2019), in which the government will execute a substantial Bt2 trillion in borrowing.

Whether the government will be able to implement these policies as planned remains to be seen. Personally, I think it is not a guarantee that Thailand will be able to avoid the middle-income trap within the next 25-50 years. Obviously, Thailand will benefit from the deeper integration of regional production networks to be expected under the AEC. The emergence of China also presents to us both challenges in terms of competition and opportunities to collaborate and rise with the Dragon. Nonetheless, I am glad that the government is beginning to take steps toward preparing the country to meet these future challenges.

Thhe Thai government will need to rethink many of its policies and long-term strategies to pave the way for the country to escape the middle-income trap for good. We need to emphasise the role of public infrastructure investment in promoting growth that is sustainable and productivity-driven. We need to create a "virtuous cycle" in Thailand, in creating reverse causality that runs back from higher growth to higher infrastructure investment - more investment generates higher growth, and higher growth results in more investment opportunities. There are numerous studies that have verified the positive effects of infrastructure investment on private investment and labour productivity.

Capital- and knowledge-intensive industries often benefit greatly from increasing returns on scale, particularly through knowledge spillovers. I am hopeful that the government will have the foresight to promote "hubs" for capital-intensive industries and establish "zoning" for those with lower capital intensity, with the overarching goal to achieve growth that is not only sustainable and productivity-driven but also inclusive in nature.

Lastly, physical infrastructure development is not everything. It is only a necessary but not sufficient condition for success. Long-term improvements in Thailand's economic wellbeing also require drastic social infrastructure measures - including, but not limited to, educational reforms; legal improvements, especially with regard to property rights and regulatory burdens for businesses; as well as improvements in government efficiency and good governance. Only with these all-round "upgrading" policies - physical and social infrastructures - will Thailand be able to achieve its potential and realise its goal of overcoming the middle-income trap within our generation.

Dr Chodechai Suwanaporn is executive vice president, economics & energy policy, PTT Public Company Limited. Chodechai.energyfact@gmail.com.