International Economics of Thailand Essay

The country of Thailand is located in the southeast Asia region, south of China and immediately bordering Burma to the west, Laos to the East and Cambodia to the south. Around 65 million people inhabit Thailand with the capital and its largest city being Bangkok; the national currency is the baht. After a series of political and military turmoil thrashed the country in the mid 2000’s, December of 2007 earmarked the reinstatement of a democratic government as well as the inclusion of full democratic elections. The official language is Thai and has remained that since the country’s early beginnings. Buddhism encompasses most the Thailand’s population in terms of religion, nearly 95%, with all belonging to the Theravada denomination. On a global scale Thailand is quite a large country for how small it is geographically; it ranks 50th as far as total area, and is the 20th most populous in the world. Thailand is abundant in both land and labor factors of production. The land measures roughly 510,890 sq km and is full of natural resources such as tin, rubber, natural gas, timber, lead, fish, and many metals. The large amount of agricultural production lead to a GDP of $539.3 billion in 2009. The 2009 household consumption expenditure was 2.05% even though the real GDP growth rate was -2.2%2. The final factor of production for Thailand, labor, is another one of their most abundant resources. In 2009, the labor force was comprised of 38.43 million people. They were divided between 42.4% working in agriculture, 19.7% in industry, and 37.9% in services3. This is consistent with the large amount of arable land throughout the country. With much production occurring in the agricultural sector, is makes sense that Thailand exports agricultural commodities. The country also exports machinery and electronic components, and jewelry. The machinery and electronic parts are a major export because of the size of the labor force.  Jewelry exports are large due to the amount of natural metals and jewels found in the land. The exports drive the economy and account for more than half of GDP. In 2009, exports totaled $150.7 billion. The major importers are the United States at 10.94%, China at 10.58%, Japan with 10.32%, Hong Kong with 6.22%, and Australia importing 5.62%3. The global financial crisis of 2008-2009 severely hurt Thailand’s exports with most industries dropping a large percent. Imports were also affected the financial crises. in 2009, they totaled $118 billion. Most imports were in capital goods, intermediate goods, and raw materials. This is because of the lack of capital factors of production and the large labor force. Thailand imports from Japan (18.7%), China (12.73%), Malaysia (6.41%), United States (6.31%), and UAE (4.98%)3. [pic] It seems to be that the groups benefiting most from trade are the farmers and factory workers. The farmers have the largest labor force and therefore the highest amount of exports in the country. The factory workers are also benefiting from the import of cheap intermediate goods and raw materials from China and Malaysia. They then use the abundance of labor to produce machinery for export. In 2009, Thailand had a trade surplus of roughly $32.7 billion. Long before the liberalization of Thailand’s economy and its move to become an export-promoting economy in the mid 1980s, Thai governments have pursued Free Trade Agreements (FTA’s) and economic cooperation with fellow countries in the Eastern Hemisphere and of course, the USA. In 1967, Thailand help create the Association for South-East Asian Nations (ASEAN). ASEAN was founded to promote nation building, tackle communism and increase economic cooperation. This act has served as the foundation for establishing future FTA’s. Continuous dialog and a desire for economic growth led to the eventual signing of the ASEAN Free-Trade Agreement (AFTA). This paved the way for the elimination of tariffs for goods with 40% of its free on-board value having local input from ASEAN member countries (asean). Following the success of AFTA and its role in facilitating local  manufacturing industries, ASEAN countries sought to expand these FTA’s. This has led to signed FTA’s between ASEAN and China, India, Japan, South Korea, Australia and New Zealand. In addition, Thai and US authorities have been working on an inconclusive US-Thailand FTA since 2004. These agreements have grown Thailand’s export markets and such access to vast growing economies has allowed Thailand to quickly return to growth following the 2008 Global Recession. Unfortunately, with all the free-trade agreements, Thailand continues to have multiple barriers to entry for most foreign entrants and even some domestic ones. They are primarily in the service and transport sectors as well as sectors with significant local production. These include tariffs, quantitative barriers, customs barriers and taxation. Few of the most affected industries are finance, law, telecommunications, air and maritime transport, wood, textiles, transport equipment and professional services. In the finance industry, foreign investors are allowed a limited equity investment of up to 49% of the company. Any investment that amounts to greater than that is treated on a case-by-case basis by the government. In addition, foreign banks have limitations on their lending capabilities and the expansion of branches. Telecommunications also limits foreign investment and in addition to this, the government allocates frequency spectrum that have resulted in two telecommunications companies dominating the industry (Dee, 2004) (US Embassy, Bangkok, 2009). On the other hand, foreigners may own Law firms in Thailand, but only Thai-citizens may provide legal services. At-best, in certain cases, foreign citizens can serve in a limited capacity as a consultant. Such a nationality requirement extends to other professional services such as accountants and physicians as well where Thai-citizens have a higher priorit and only non-citizens that are a resident of Thailand and fluent in Thai are eligible. Industries such as wood and wood products (12.5% tariff), transport equipment (31% tariff) and textiles (25% tariff) continue to have import tariffs and licenses to encourage local production and ensure it is not  harmed. All of these tariffs are between 2 and 4 times the global average (Dee, 2004). Such tariffs are common practice all over the world to protect local businesses. In addition to these tariffs, Thailand’s barriers include several indirect methods that have a less tangible impact. Thailand’s complicated tax system is one such example. When one adds up the import tariff, excise duties and other sales tax on imported alcohol, the price is 400% higher. To complement these barriers, Thailand’s government adapted a â€Å"Buy Thai† policy, much to the resentment of foreign investors. In addition, the Customs department reserves the right to arbitrarily increase the import value of goods (US Embassy, Bangkok, 2009). Lastly, the lack of enforcement of Intellectual Property Rights and Patent laws cost US companies $400 million in 2007 (US Embassy, Bangkok, 2009). Pharma companies and Hollywood have had the most direct impact due to copyright infringements, delayed patents and its non-enforcement. Such haphazard barriers by the Thai government can dissuade potential investors. These barriers have a multi-purpose aim. Some tariffs are meant to be revenue generating tariffs, while others cost escalating. These cost-escalating tariffs stand to protect a local industry such as textile manufacturing, wood and timber logging. Barriers in the maritime and air transport have large capital requirements to enter it as well as a vested government interest in the form of state-owned airlines, airports and ports. Other barriers related to haphazard law enforcement and the â€Å"buy Thai† policy and seem less so economic barriers and more so politically motivated ones. A reversal in such barriers would allow air-passenger transport, maritime transport and communications to benefit the most and enable the finance, law and professional services industry to shore up its presence in Thailand while continuing to expand trade, commerce and therefore economic growth in the country. Simultaneously, the government aimed to stimulate domestic and foreign private investment over the coming decade by adapting Export Promotion (EP)  policies that decreased import tariffs, eliminated export tariffs and established the Board of Investment of Thailand (BOI). While initial investments were aimed at domestic-market production, this quickly moved to export-oriented production that was not limited by the size of the domestic market. This led to Foreign Direct Investment (FDI) ballooning from $40 million in 1970-1974 to $19 billion in 2006 (Kohpaiboon). Countries such as Japan, South Korea, Singapore and Taiwan had successfully adapted to export promotion policies while even more countries saw the negative effects of import substitution policies (South America). These polar effects point out the benefits of a trade-centered integrated economy. An exponential increase in FDI requires a stable banking system that is globally integrated. Unlike its Asian peers, almost half of Thailand’s 37 banks are foreign banks such as HSBC, Citibank and Standard Chartered. This has resulted in a strong banking system with assets worth 200% of GDP (Datamonitor, 2010). Other developing countries continue struggle with a government dominated banking system and low population penetration. Sustained growth in FDI has had spillover effects on Thailand’s human capital development and R&D projects to further aid economic growth. The BOI, since 2006 has been actively promoting R&D investments, bagging projects from companies such as Toyota, Honda and Siam Cement. In addition to this, the government has allocated $3 billion in the next 5-year plan for R&D projects with institutes such as Asian Institute of Technology taking lead (Datamonitor, 2010). Such spending has allowed domestic companies to adapt current technologies used world over while evolving new ones. This is a drastic change from the mid-1980s in Thailand when oxes and manual labor characterized agriculture and industry alike. In order for the results of R&D projects to be useful and then successful, an educated workforce is necessary. Starting in 1960, Thailand expanded its schooling system and made schooling mandatory for the first 7 years (Ministry of Education, 1998). A full generation later, the basic impact is visible. By 2006, Thailand boasted a 92% literacy rate, comparable in the region (Taiwan, Hong Kong, South Korea, Japan and Malaysia boast 90%+  literacy rates) and allocates 27% of its national budget to education (Malaysia allocated 20%) (UNDP, 2009). One current constraint is that 80% of the current workforce has had only primary education. However, the long-term impact of education should change this statistic over the coming decade and encourage further labor efficiencies. Unfortunately, a primary educated workforce is not Thailand’s main constraint to growth. In the years following a decade of high-paced growth, the Asian Financial Crisis, consequent political upheavals, natural disasters, corruption and such threatened to derail the Thai story of growth. In spite of all this growth, the high short-term external debt of its government nearly bankrupted Thailand, caused the stock exchange to lose 75% of its market value and devalued the then-pegged Baht by over 50%. The Thai economy came to a halt with layoffs across industries, depressed asset prices and a 12% cumulative drop in output for 1997-1998. This led to an inevitable $40 billion IMF-led rescue package for the most affected Asian economies (Hunter, Kaufman, & Krueger, 1999). The package allowed Thailand’s economy to stay solvent and resume growth only in 1999. The Asian Financial Crisis marked a start in Thailand’s sporadic political upheavals. This culminated in 2006 when Prime Minister Thaksin was removed from office in a bloodless coup while he attending the UN General Assembly in front of the world’s eyes. The 4 years since has seen scores of public demonstrations, 3 Prime Ministers and a riot culminating in the summer 2010 stand-off between the armed forces and pro-Thaksin demonstrators in central Bangkok. Meanwhile, neighboring countries such as Philippines, Vietnam and even Indonesia have moved toward political stability with their leaders transitioning their country into a period of economic growth (Marshall, 2010). These upheavals are a source of concern to international and domestic businesses and have a negative ripple effect through the economy. In fact, Thaksin is not the only corrupt politician to grace Thailand. Corruption plagues many institutions and bureaucracy’s there. Transparency international ranked Thailand 84th out of 178 countries on the Global  Corruption Index with China falling ahead in 78th position and India just behind in 87th place. Like most sizable developing countries, corruption is rampant in Thailand and other high-profile cases include the governor of Bangkok, Mr. Apirak. In 2009, the Thai government reported that the most number of corruption complaints within government agencies were filed against the Customs Department (Datamonitor, 2010). Taking cue from Singapore, Thailand must be more pro-active in reducing this rampant corruption in order to focus on economic and social development. Singapore along with New Zealand and Denmark topped the least for least corrupt countries (Zee News, 2010). Another growth constraint is natural disasters. In 2004, an earthquake followed by a tsunami caused widespread havoc and destruction. While Thailand’s direct impact was lower than Indonesia, with over 5,000 lives lost, 30,000 fishing boats and 120,000 tourism jobs lost, its effects cannot be ignored. Such continued disasters can hamper progress and instead undo years of economic development. Countries ranging from Indonesia to Seychelles were affected by this (United Nations, 2005). As the 1997 Financial Crisis demonstrated, Thailand is very integrated into the world’s economy. Therefore, with the arrival of the Great Recession in 2008, demand for its export-oriented production began to fall. Thailand’s dependence on exports put the country into a yearlong recession that it is now out of. In fact, Thailand is expected to grow at 4% this year. This quick recovery has been due to the deliberate public spending undertaken by the government. With the government undertaking a 5-year plan to boost infrastructure spending and reduce poverty, Thailand should see sustained growth over the coming years. As Thailand emerges from the Great Recession of 2008, there are several helpful pointers Thailand has taken from its experiences since the Asian Financial Crisis. The Thai government has learned of the benefits of a balanced budget, they successfully reduced government debt between 2002 and 2008, repaid IMF loans (2 years early) and regained growth. While corruption continues to exist, Thailand has an increasingly tougher National Counter  Corruption Commission and current Prime Minister Abhisit has proposed a Reconciliation Plan to create a more transparent, clean government. The tsunami has resulted in the implementation of an emergency alert system thereby preventing future calamities, social and economic losses. With a majority of new growth coming from Asia, Thailand is optimally situated as an export economy in the region. Strong historical ties to the US will ensure economic cooperation as the US economic recovery progresses. Continued spending on education will result in an efficient, productive labor-force allowing Thailand to grow from just an international finance center to an advanced technology driven, export oriented economy in the years to come. Economic policy outlook The government is pushing ahead with a major fiscal stimulus program worth Bt1.4trn (US$43bn), which is to run until 2012. However, the fiscal position is weak, and the government could struggle to finance the program in full without risking future financial stability. This second-stage stimulus program, known as Thai Khem Khaeng (Strong Thailand), centers on infrastructure projects as well as investment in agriculture, education and health. Owing to the fact that the government has only limited fiscal freedom (constitutional restrictions cap the budget deficit in any year at 20% of total expenditure), the majority of the programs spending is off-budget and is financed through increased borrowing. The government actually plans to reduce budgetary spending in fiscal year 2009/10 (October-September) in an attempt to contain the fiscal deficit, which ballooned in 2008/09 owing to a first-stage stimulus program that included cash grants and subsidies. The government is proposing another expansionary budget in 2010/11. As the economy begins to recover in 2010, the Bank of Thailand (BOT, the central bank) will begin to raise interest rates to contain inflation. As for the fiscal policy, the government will run a substantial budget deficit in 2010-11, but it should be narrower than in 2009, when it reached the equivalent of 4.4% of GDP. After reducing planned expenditure in 2009/10  by Bt200bn (US$5.8bn), the government proposes to increase it by about Bt400bn in 2010/11. It is also stimulating the economy with the Thai Khem Khaeng program of off-budget expenditure. Whether or not the program succeeds in stimulating growth, hinges mostly on its implementation. There is a risk that some funds will be lost to corruption or will be wasted, as was highlighted by a recent admission by the Comptrollergenerals Department that funding for projects previously rejected by the Budget Bureau had been approved owing to the government!s determination to proceed with economic stimulus. Assuming that the government receives full parliamentary approval to borrow another Bt400bn in the next three years, public debt could rise sharply relative to GDP in 2010-11. However, the finance minister, Korn Chatikavanij, recently said that as revenue growth so far in 2009/10 had exceeded expectations, the government might not need to borrow as much as it had originally planned. The BOT will begin to tighten monetary policy in second half of 2010 as the economy starts to recover and core inflation (which excludes raw foods and energy) accelerates. However, the central bank will not raise interest rates sharply, as there are still major risks to the recovery, and core inflation, which stood at 0.5% in January-February, remains at the low end of the official target range of 0.5-3%. The BOT has also expressed concern that prematurely raising the one-day repurchase rate†which stands at 1.25%, having been lowered by 250 basis points between December 2008 and April 2009†³could lead to inflows of foreign capital, pushing up asset prices to unsustainable levels and causing the baht to strengthen further. Works Cited CIA. (2010). Thailand. Retrieved November 20, 2010, from CIA – The World Factbook: www.cia.gov/library/publications/the-world-factbook/geos/th.html Datamonitor. (2010). Thailand, In-depth PESTLE Insights. Datamonitor. Falvey, L. (2001). Thai Agriculture: Golden Cradle of Millennia. White Lotus Co Ltd. Hunter, W., Kaufman, G., & Krueger, T. (1999). The Asian Financial Crisis: Origins, Implications and Solutions. 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