A balanced approach: Aiming to reduce inequality and increase domestic value added

Framed by the overarching Sufficiency Economy Philosophy (SEP) developed by King Bhumibol Adulyadej, Thailand’s development policy aims for inclusive and broad-based growth that leverages key strengths of the economy towards higher domestic value added. Having successfully evolved from a primarily agrarian society to an economy with a wide manufacturing base, authorities seek to leverage innovation to avoid the middle-income trap. While hikes in the minimum wage in the past two years aim to promote greater efficiency, Thailand’s education system and innovation infrastructure require further investment. Five-year development plans formulated by the National Economic and Social Development Board (NESDB) are key to implementing longer-term strategies insulated from political change.

Development Philosophy

Refined over more than 20 years and articulated in three royal birthday speeches in 1997-99 following the Asian financial crisis, the SEP is a balanced approach to development similar to Bhutan’s gross happiness index and the principle of Buddhist economics. “Sufficiency means leading a reasonably comfortable life, without excess or overindulgence in luxury, but with adequate provisions,” the King’s speeches proclaimed. “Sufficiency has three components: moderation, wisdom or insight, and the need for built-in resilience against risks.” A middle path ensuring sustainable economic development, the philosophy has instructed policymaking by all ruling parties since then, as well as the NESDB’s five-year plans. From the eighth plan to 2001 onwards, planning evolved from a focus on growth to more comprehensive, people-centred development, while the 10th plan introduced a green and happiness index that tracked factors ranging from economic growth to community and family ties. The 11th plan, to 2016, continues the focus on inclusive growth and reducing inequality, both through infrastructure investments and targeted sectoral policies. Indeed, the 2014 budget sets four priorities of growth and competitiveness, inclusive and green growth, and good governance. “With Thailand’s aggregate poverty rate already quite low by international standards, our planning focus is now on creating broad-based inclusive growth that is based on green innovation and reducing regional disparities,” Porametee Vimolsiri, the NESDB’s deputy secretary-general, told OBG.

Another aspect of the King’s philosophy that has taken on greater prominence since the 2011 floods is the New Theory, spelled out in 1992, but which has guided royal development projects carried out by the Mae Fah Luang Foundation (MFLF) over previous decades.

While it focuses on sustainable agricultural land use, the theory also has implications for flood prevention and water management. Water projects, which account for some 40% of all royal projects, according to the MFLF, took on greater significance post-2011. The southern town of Hat Yai in particular was seen as a success, with flood-retention areas and six large canals supporting a rapid recovery from floods in 2010.

The delayed water management infrastructure projects worth a total of some BT350bn ($11.4bn) draw significantly on such previous successes. While water projects are key to reassuring existing industrial investors, the government aims to support a broader shift in the economy’s industrial base towards higher-end, internationally competitive production.

Knowledge Based

While moderation and inclusiveness play a key role in policymaking, the search for new long-term growth drivers has driven both major parties to launch efforts to enhance value-added components of the economy. “Although the export value of traditionally key automotive and electronics exports is high, the amount of value added within Thailand remains relatively low,” Vatcharin Sirimaneetham, economic affairs officer at the UN Economic and Social Commission for Asia and the Pacific, said. “Authorities are focusing on attracting higher value addition domestically, although this is constrained by the existing skills base, as well as the level of vocational training and higher education.” The Ministry of Industry’s 20-year master plan published in 2010 sets out to revise investment incentives to drive innovation, improve efficiency and the ratio of labour to raw materials, capitalise on ASEANwide supply chains, and increase investment in research and development (R&D). “There are many local Thai companies that have grown up and are looking to expand their business internationally and have been very successful in doing so. You are seeing Thai companies being more assertive, confident and them beating household names that have been around for years in transactions that really make economic sense to the client,” Darren Buckley, the country head of Citibank Thailand, told OBG. Rising labour costs and standards of living and the ageing population have prompted Thai authorities to focus on leveraging innovation as a driver of growth. Although investment in R&D has remained at 0.22% of GDP over the past decade, compared to Japan’s 3.39%, South Korea’s 3.22%, Singapore’s 2.25%, China’s 1.44% and Malaysia’s 0.64%, successive governments have aimed to boost this to 1% by 2016 and 2% by 2021. While public-sector R&D investments account for two-thirds of the total, the Ministries of Science and Technology, Education and Industry have promoted linkages and co-research between businesses and public universities and four technology centres operated by the National Science and Technology Development Agency. Still, partly state-owned firms like PTT dominate R&D spending. Although the number of patents registered in Thailand has risen over the past decade from 99 in 2008 to 130 in 2012, Thailand is still ranked as having the region’s lowest ratio of patents per capita, according to the World Bank. Speeding up patent approvals and boosting R&D investment are crucial.

Labour Reform

Key to Thailand’s development objectives are efforts to drive labour productivity growth to match wage increases, while reforming the education system. Although labour productivity has grown 30% in the decade to the third quarter of 2013 and had outpaced wage increases until 2011, according to Bank of Thailand data, inequality has remained consistently high with a Gini coefficient of 0.45.

“Despite relatively high growth over the past decade, income inequality has continued to rise,” Vatcharin told OBG. “This is partly because as firms acquire more technology, they require a higher skills set, expanding the labour market gap.” Meanwhile, with unemployment hovering around the 0.6% mark in 2013, the prospects of an ageing population pose significant challenges for the supply of unskilled labour in the medium term.

Thailand’s full employment reflects the labour market’s degree of flexibility. “The Thai labour market is quite flexible in some aspects: workers move quite freely between industry and agriculture, for instance,” Pisit Puapan, the director of the macroeconomic analysis division at the Fiscal Policy Office, told OBG. “Meanwhile, our definition of unemployment, in line with International Labour Organisation standards, categorises anyone who works at least an hour a week as employed.”