Managing global adversity after poll

Managing global adversity after poll

Thailand cannot run away from global economic headwinds but it can hedge by relying on nearer markets.
Thailand cannot run away from global economic headwinds but it can hedge by relying on nearer markets.

Discounting its disrupted precursor in 2014, the imminent first poll in nearly eight years has put the country's political future on the line.

At the same time, adverse global economic conditions from the United States-China trade war to the Brexit quagmire in Europe and China's slowing growth are posing headwinds for the global economy.

These risks compound the challenges facing the economy as it continues to cope with structural shortcomings and the lack of clear policy, stemming from its murky domestic politics. Even if its political situation were more stable and predictable, this country would have its hands full handling a global economic downturn. But with things so unsettled and contentious, the challenge of managing economic adversity becomes more acute.

Pavida Pananond is Associate Professor of International Business at Thammasat Business School, Thammasat University.

For the economy to move forward, more emphasis should be placed on taking advantage of Asian regional dynamism and tackling overdue structural reforms that can position the government to grapple with increasingly complex changes and challenges in view of the forces of "deglobalisation". In addition to developing higher efficiency and more sophisticated resources, more focus could be placed on the interwoven intra-Asean trade and investment as a buffer against global headwinds.

By all accounts, the global economic outlook for 2019 appears alarming. Both the World Bank and the International Monetary Fund (IMF) recently announced downward revisions to their growth rate for 2018, with even slower trends for 2019-2021. The IMF projects the global economy to grow by 3.5% in 2019 and 3.6% in 2020, a downward revision of 0.2 and 0.1 percentage points from its assessment last October. Similarly, the World Bank forecasts global GDP expansion to be 2.9% in 2019 and 2.8% for 2020-2021, down from a 3% growth last year. Both institutions attribute the dimmer outlook for the world economy to geopolitical tensions, particularly the escalation of the US-China trade conflict.

On the home front, even though the World Bank and the IMF consider the Thai economy to be resilient, both have warned against a slowdown in 2019 due mainly to dampening export demands, forecasted at 3.8-3.9% for 2019-2020, compared to 4.6% projected by the IMF for 2018. On the contrary, local institutions, such as the National Economic and Social Development Board (NESDB), are more upbeat, predicting growth rate for 2019 to range between 4.2 and 4.7%, owing to higher public investment. Yet these more optimistic assessments may reflect a change in sentiment following greater clarity on the election date.

The upshot is that the economy, despite its political circles and dead ends in recent years, is not tanking. But that's not the point. It should be doing better than being indefinitely subpar. Eventually, without structural drivers and new strategies for economic expansion, this country's economic engine may slow into a sputter.

What Thailand needs now is not simply growth, but more "quality growth" that is driven by higher productivity and value-added activities. What this means is that the economy has to derive its dynamism from more complex and sophisticated activities such as innovations or marketing and brand-name creation.

While these tasks can be speedily created by giving incentives to foreign multinational companies to set up their activities here and allowing skilled foreign personnel to relocate to special economic zones such as the Eastern Economic Corridor, the more sustainable way to enable Thailand to partake in high-growth stages in global industries would be to enhance the resources and factors of production that this country has to offer to global companies.

While specific demands for each industry may differ, a more sophisticated environment that could foster more value-creating activities generally requires highly skilled human capital as well as strong regulatory and institutional frameworks that could efficiently facilitate and promote higher productivity in economic and business transactions. It is therefore worrisome that Thailand's performance in these key indicators are still relatively poor in comparison to other countries in the region.

Take labour productivity, for example. According to the Asian Productivity Organisation's 2017 report, Thailand trails behind many emerging economies in the region for its labour productivity growth per worker. Compared to top-ranking China's average annual growth rate of 8.8% and Vietnam's 5.0%, Thailand's 3.2% average rate is meagre. Another important indicator of a country's readiness for high value-adding investment is R&D spending. At 0.6% of GDP, Thailand pales in comparison to the average of 1.7% for upper middle-income countries and China's 2.1%, according to Asian Development Bank.

However, not all hope is lost, as the increasing significance of intra-Asia trade and investment provides a favourable context for export-dependent countries in the region. While the rise of US protectionism and Brexit uncertainties may dampen demands from Western markets, East and Southeast Asia can fill in the void.

According to the OECD Trade in Value Added Database, East Asia is becoming the main source of final export demands for the region itself. In 2007, the US, the EU and other Western economies made up 45.5% of final export demand from East Asia (excluding China), while intra-East Asia trade only accounted for 32%. A decade later, the direction of trade took a U-turn and the ratio of final demand from the West shrank to 35.6% while East Asia became its own largest market, accounting for 40.3% of final exports.

Similar trends can be observed for Thailand. In 1997, the country exported a meagre 3% to China, while the US accounted for a sizable 19.4% and Asean topped the rank at 21.83% of total exports. Two decades later, Asean accounted for a quarter of Thailand's total exports, while China outranked the US at 12.5%.

Clearly, this country cannot run away from global economic headwinds but it can hedge its bets by relying on nearer markets as faraway economies in the US and Europe no longer offer as much as in the past. Apart from dynamic Asian markets, Thailand can help itself in absolute terms by carrying out structural reforms that could usher the country toward a more sophisticated growth path.

Pavida Pananond

Thammasat University Professor

Pavida Pananond, PhD, is Professor of International Business at Thammasat Business School, Thammasat University.

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