Services as a New Driver of Growth for Thailand

Services as a New Driver of Growth for Thailand

There's a good chance you work in the service sector. Services account for 17 million jobs in Thailand, or about 40% of the labour force. The sector encompasses diverse industries such as tourism, retail, health, communications, transport and many sought-after professions such as architects, engineers, lawyers and doctors. Many Thai parents aspire for their children to join the service sector, and the sector carries many of Thailand's economic hopes and ambitions.

Industries that are likely to be important in the future, such as medical and wellness tourism as well as logistics and aviation, are in the service sector. Other key industries such as robotics, food for the future and smart electronics will depend on services for critical inputs. Educational services will also provide the training and skills necessary for any modern and innovative economy.

Why do services matter for the Thai economy? A dynamic and growing service sector can become a critical engine of growth. Advanced economies such as the US and the euro area tend to be dominated by the service sector, which makes up 70-80% of GDP. Much of the value, even of manufactured goods, is derived from support services rather than manufacturing itself. For example, an estimated two-thirds of the value-added of smartphones, such as the Apple iPhone or Nokia N95, stem from internal support services, licences, retailing, distribution and operating profit. Assembly accounted for less than 10%.

Even the value-added of a typical jacket made in China and sold in the US is accounted for largely by invisible assets such as services, intellectual property and profits. While developing Asia accounts for most of the manufacturing and assembly, most of the benefits go elsewhere, to service providers based in advanced economies.

How does Thailand's service sector fare? Thailand's service sector share has remained stuck at about 50% over the last two decades, is dominated by lower-productivity industries employing lower-skilled workers, and boasts a low share of service exports which tend to be in "traditional" sectors. Thailand has not shown the sustained increase in the share of the service sector observed in Asean and non-Asean peers as well as advanced economies. For example, China's service sector as a share of GDP is growing rapidly and is close to catching up with Thailand.

How can the potential of the service sector be unleashed? A number of examples from close to home in Asean highlight how a combination of private-sector initiative and government support to enable businesses and monitor quality standards can increase service output and exports. Examples include financial services in Singapore, higher education in Malaysia, health services in Thailand, and telecommunications-based services in Philippines.

For Thailand, a supportive regulatory environment for doing business is needed, along with reduced policy restrictiveness, both at the border and behind the border. This must be complemented by greater competition and deeper trade integration through, for example, implementation of Asean Economic Community commitments to foster productivity growth and innovation, particularly in services. In addition, addressing skill gaps and ensuring quality education for all are important for ensuring worker readiness.

A World Bank study finds that Thailand has a more restricted service market on average compared with Asean peers and other regions in the world, particularly in professional services such as accounting, legal, architecture, engineering and management consulting. For example, a dentist from the Philippines would have to take an exam in Thai in order to practise here.

While Thailand has reaped the benefits of past liberalisation in manufacturing, merchandise trade and imports of capital with tariff rates coming down from 40% in the 1980s to 9% in 2006, liberalisation failed to encompass the whole economy. Many services, state enterprises and domestically oriented industries remained relatively sheltered from competition.

For instance, foreign entry and investment into many service sectors, as well as delivery of some services by foreign firms, are restricted. Education and health facilities, for example, are required to be majority Thai-owned. In the financial services sector, liberalisation has made progress despite apparently restrictive laws. Most, if not all, commercial banks are majority foreign-owned but not necessarily foreign-controlled. So far, two foreign bank licences for both wholesale and retail have been granted.

Thailand's economic growth is expected to reach 3.1% in 2016 and 3.2% in 2017, accelerating from 2.8% last year. While there will be external challenges from more uncertain global economic prospects, Thailand's continued commitment to structural reforms could unleash the potential of the service sector and lift the country's long-term growth path above 4% per year and take the country from the upper-middle to high-income level.

Thailand's economy is on track to recovery and further strengthening of the service sector will help create new and better jobs, higher incomes and more opportunities for Thai people. And who knows, perhaps you could be the next Jack Ma or Tony Fernandes.

Ulrich Zachau is World Bank country director for Southeast Asia. This article is based on the findings of the December 2016 issue of the World Bank Thailand Economic Monitor.

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