Online trading spells massive job losses
By writing about Sampheng, Bangkok's premier wholesale market, this column does not want to stress the weakness of the economy. It is pointless to keep whining about the sluggishness of the economy as it is already a well-known fact. Even the government can see the true picture of the economy by simply looking at its tax revenues. Poor-performing businesses do not pay taxes and jobless people also do not pay taxes.
This article is about a changing economic structure which will profoundly affect the economy -- in a negative way. This structural change is the rise of online businesses. And Sampheng, Pratunam, and Bo Bae wholesale markets are among its victims.
Last week news reports said Sampheng's business is at its slowest in 50 years. Many businesses are closing down and one trader claimed that business is down by 70%.
Similar things are being experienced at other key Bangkok wholesale markets like Pratunam and Bo Bae. Of course, one can blame the sharp drop in business volume on weak domestic demand and the strong baht. But this can only be partly to blame as business volume started to decline three or four years ago, according to traders at the markets. At that time, demand was not weak and the baht was far from strong. The true culprit must have been something else, such as the rise of online businesses.
Before the advent of online businesses, individual consumers and retailers had to physically go to wholesale markets -- like Sampheng, Pratunam, and Bo Bae -- to get products. Now they can order things directly from manufacturers and wholesalers in foreign countries, mostly from China, through online shopping websites like Lazada, Alibaba and Taobao.
With today's easy cross-border payments and efficient logistics, products will arrive on your doorstep in no time. And at much cheaper prices too. That is because you get rid of expensive wholesalers like those at Sampheng market.
You can dismiss this as a sign of the times. Old business is routinely replaced by new business. The arrival of mega-supermarkets, so-called modern trade outlets, kills traditional community markets. Convenience stores kill neighbourhood stores. That is a fact of life.
But these structural changes do not affect the economy as a whole. Simply put, GDP remains the same, because economic activities remain in the same cycle -- from suppliers to distributors to consumers.
What is changed by modern trade is the face of distributors from traditional markets to hypermarkets, or from neighbourhood stores to franchised convenience stores. As I said, the total income of the economy is unchanged. But this is not the case for online businesses.
Doing business online eliminates distributors or wholesalers which means a loss of income for them. Consumers can directly connect to suppliers and there is no need to pay distributors. Even online shopping websites which function as a type of distributor have little distribution cost compared to regular wholesale/retail outlets. (Now you understand why Jeff Bezos of Amazon online shopping is the richest man in the world.) And in Thailand, distributors' income last year was 2.7 trillion baht per year, which accounts for 16.6% of GDP.
Let's look at some calculations. If online businesses eliminate a quarter of traditional distributors, like what is happening at Sampheng market, Thai GDP will shrink by 4.14%, or 675 billion baht per year. And if online business captures half the wholesale/retail business income, the economy will shrink by 8.28%, or 1.35 trillion baht. This is certainly not a small matter. If you think this idea is far-fetched, just consider the possibility of the disappearance of Sampheng market. The closure of the 230-year old market alone would eliminate tens of thousands of jobs and result in tens of billions of baht of lost revenue. This is just one wholesale market. When this becomes a nationwide phenomenon, and it will, the effects will be more severe.
Some might argue this is a zero-sum game and there is nothing to be concerned about. The money saved by customers through online shopping will be re-spent in the economy and therefore GDP will not be affected. I would argue otherwise. A large part of the money will be spent on foreign products, and online shopping websites are all foreign-owned. Even the logistics system is foreign-owned. Therefore, very little will be recycled back into the Thai economy.
I have nothing against online shopping as I am an ardent online shopper. But policymakers will have to quickly react to this phenomenon and prepare appropriate economic measures to lessen the effects of job losses and hit to GDP, and more importantly, the lost tax revenue. Currently, the wholesale and retail trade sector accounts for approximately 480 billion baht a year in tax revenue. The shrinking sector also means a direct loss in tax revenue, which is something the government cannot afford to lose.
From the 2017 Thai Labour Force Survey, 6.5 million people worked in the wholesale/retail trade sector. If there is a 25% shrinkage of the sector due to online business competition, about 1.6 million people will be laid off. The government must plan for this massive unemployment as this will certainly become the biggest and the most important social and economic issue in the country. And the scary thing is that it is happening right now and the situation will only get worse as online marketing progresses. Just think. When customers can pay with Libra, Facebook's developing cryptocurrency, online, why would they bother going to traditional markets?
Maybe I will write about cryptocurrency in a future article. But let me say that it is in the US's interest to push for the global usage of Libra. Libra is not just about Facebook, it is about the US's continued domination of the world financial market. I am sorry I do not have a good solution to online-induced economic structural change. It is another fact of life that one has to accept and cope with the best we can. The big question is: Is the government ready?
Chartchai Parasuk, PhD, is a freelance economist.
Chartchai Parasuk, PhD, is a freelance economist.