]It is now widely agreed that Thailand's low wages and export-oriented economic development model have been very successful in substantially decreasing poverty and enhancing standards of living for the past four decades. But that cannot push Thailand to progress further as the country now faces growing competition from low-cost producers like China, India, Vietnam and Cambodia.
A photo of a farmers’ protest demanding state help. Farm debt is one of the longstanding problems resulting from systematic inequality that impedes economic growth. APICHART JINAKUL
Despite an overall improvement in the standard of living over decades of economic development, income disparities between the poor and the rich have not been substantially improved and remain very large.
Inequality is not just a side effect of economic development, but it also affects the growth path. The relationship between growth and inequality is not one way. Many recent studies, some of which cover a large number of countries have shown the reverse causality under which inequality determines the rate of long-run growth.
It is not difficult to see why inequality is the main obstacle to Thailand's next step towards improving the standard of living of the lower rungs of the Thai population. In a market-oriented economic system, sustained economic growth with fair distribution puts money in the pockets of the majority of people, expands domestic markets, enables people to advance themselves, allows government to increase revenue to pay for better public goods, and enables society to achieve greater political stability.
Greater income equality may also reduce other inequalities which impede economic growth. Education inequality is a good example. A growing number of studies provide convincing evidence that education quality is important to long-term growth. Education enhances both the human capital and the innovative capacity of society as well as facilitating the transmission of knowledge.
In Thailand, household expenditure on education varies depending on household income and the education level of the household head. More serious are the low standards and variability in education quality. Enrolment rates have increased rapidly in recent decades but the quality, as measured by standardised international tests, is low compared to international averages. Students from Bangkok and other urban areas generally receive education of higher quality and have higher chances of being admitted to colleges than those from the provinces. This disparity is also evident in the international scores.
The problem is not inadequate budgets for education. Thailand's spending on education is comparable to the average of neighbouring East Asian and Pacific countries. Rather there are structural problems in the education system and a poor institutional environment. Some argue that an over-centralised regulatory structure and a lack of accountability in the education system lead to inefficient use of resources. There has been strong resistance from the bureaucracy against the decentralisation programme, including for education. Decentralisation could shorten the route of accountability, increase parental involvement, improve monitoring of performance, and provide more effective incentives to teachers.
The issue of high and persistent wage disparities needs to be addressed. Wages have been kept low to support export-driven growth based on cheap labour. Over the past two decades, the minimum wage has not kept up with inflation.
Low and declining real minimum wages reflect the weak bargaining power of workers. Labour organisations are legal but are highly restricted by law, with only 7.6% of workers being members of labour unions. Workers have no direct participation in the process of determining the minimum wage. The low wage development model provides no incentive for firms to upgrade production technology, move up the value chain, and improve labour productivity.
The recent increase in the minimum wage rate to 300 baht per day is a subject of intense debate and it is still too early to observe its complete effects. However, early inflation data show that prices have not risen as steeply as some alarmists predicted and some studies have found no significant impact on overall employment. This aspect considers how Singapore's wage policy successfully forced firms to upgrade technology.
On the political economy side, oligarchic politics is the main obstacle to economic reform. The oligarchic structures consist of several distinct but overlapping and interlocking groups of powerful people including senior bureaucrats, military elites, business tycoons, and the senior judiciary. The structure has developed from an earlier incarnation under the absolute monarchy.
Major political and economic networks have a strong influence on politics and policy-making, both at national and local levels.
In recent years, two powerful organisations have emerged in the energy sector. Because of their hybrid semi-public, semi-private character, they enjoy all the privileges of public enterprises, such as monopoly power in some activities, and also have many of the advantages of a private enterprise, such as investment incentives. Rules that allow individuals to take multiple positions as executives, directors and regulators create large problems over conflicts of interest which in turn lead to policies with suboptimal social benefit.
Local power networks are adjusting to the emergence of a two-party system in national politics. National parties seek alliances with influential local business _ politicians controlling a local base of support. Local politicians secure the cooperation of local government officers by sharing certain benefits. The national party also exerts some hold over local bureaucrats through the centralised system of promotion decision-making at the ministerial level.
Several quasi-academic institutions have been created in order to forge new alumni networks linking business leaders, politicians and the bureaucratic elite. These institutions sustain the personal bonds which tie the oligarchy together, and create space for negotiating cooperation for mutual benefit.
Powerful groups from the security sector, politics, business, the judiciary and selected segments of civil society cooperate to set policies and divide the spoils. The strength of these networks helps to insulate the oligarchy from popular pressures in favour of redistribution or other reform policies that would benefit the mass of the population.
Decentralisation, democratisation and civil society activism are ways to challenge these oligarchic structures and create the space for reform. Decentralisation already has a momentum of its own, as local people have benefited and have already formed associations to promote further decentralisation and democratisation, but these efforts face strong resistance from the central bureaucracy.
Change can only come about through social forces working from below. But this will take time. The process could be accelerated if conservative forces were motivated to spearhead moderate reforms in order to temper conflict and avert more radical change.
Pasuk Phongpaichit is emeritus professor at the faculty of economics, Chulalongkorn University. Pornthep Benyaapikul, PhD, is a lecturer at the faculty of economics, Thammasat University. The article is part of the seminar on "Middle-Income Trap: Economic Myth-Political reality: Case Studies of Malaysia and Thailand", supported by the Asia Foundation, organised by the Political Economy Centre, faculty of economics, Chulalongkorn University.