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“Middle Income Trap and the Thai Service Sector � October 21 21, 2013 EFN Asia Conference 2103

Deunden Nikomborirak

Thailand Development Research Institute


Presentation Outline 1. Role of Service Sector in the Thai Economy 2. Opportunities 3. Challenges 4. Conclusions & Recommendations


1. Role of Service Se ctor


Growth Prospects of the Thai Economy 1. 2.

3.

Thailand needs to break away from the “Middle Income Trap” TDRI’s assessment of the impact of the minimum wage increase to 300 baht nationwide reveals that GDP growth ca n remain positive if labour productivity increases 8.4 %. Bank of Thailand’s assessment shows the Thai labour productivity needs to increase from 4% to 8% to compensate for the wage hike.


44%

Thailand cannot break away from the middle income trap without a reform of th e service sector of labour force is employed in the service sector

Half

100%

100%

90%

90%

4070% 4333% 4436% 4487% 4497% 4503% 4520% 4553% 4556% 4580%

80% 4094% 4105% 4225% 4225%

80%

70%

70%

60%

60%

of GDP is contributed by the service sector

4874% 4875% 4931% 4953% 4946% 4963% 4977% 5000% 5023% 5113% 5104% 5132% 5183%

1394% 1486% 50% 1528% 1535% 1566%

50%

40%

40%

30%

4022% 4235% 4086% 30%3810% 4295% 4140% 3857% 4121% 4184% 3826% 4084% 3900% 4113%

2060% 1354% 1350% 1542% 1380% 1550% 1577% 1473% 1585%

4502% 4420% 4247% 4240% 4211% 4130% 4102% 4040% 3971% 3971% 3947% 3926% 3862% 3870%

20% 10%

0%

1999

2001

2003

Agriculture

2005

2007

Manufacturing

2009

2011

Service

Source: National Income Account, NESDB

20% 10% 1041%995%1047%961%902%897%870%891%916%830%863% 1030% 1007% 0% 1999 2001 2003 2005 2007 2009 2011 Agriculture

Manufacturing

Service


Labour productivity in the service sector is stagnant and well below that in the manufacturing sector 1,000 baht at 1988 prices 400 350 300 250 200 150 100 50 0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: NESDB and Ministry of Labour

Agriculture Manufacturing Service


Labor productivity growth by sector (2007-11) ave growth (%) 80 70 60

69.2

50 40 30 20 10 2.5 0.4 0 electricity gas water -1.2 -10

Source: NESDB

3.4

3.9 finance

3.8 -5.9

0.7 education -3.8

6.1 -0.8


20

Service sector “drags” economic growth

YOY(%)

15 10 5

-10 -15

Source: NESDB

Agriculture

Manufacturing

Service

2010

2008

2006

2004

2002

2000

1998

1996

1994

-5

1992

1990

0


Conclusions 1.

2.

Low labour productivity in the service sector can be attributed to the foreign equity share cap at 49% in the servi ce sector and domestic rules and regulations that serve to e ntrench market power of incumbent operators. Low growth and labour productivity in the service sector leads to (1) low wage (2) high costs, low quality and less ad vanced services, which undermine the competitiveness of th e export-oriented manufacturing sector.


2. Opportunit ies


ASEAN Economy ranks 6th in terms of size 18 16 14 12 10 8 6 4 2 0

GDP (PPP) 2011 – trillion USD 15.8

15 11.3

EU

US

China

4.5

4.4

India

Japan

3.5

ASEAN

แหล่ง ที่ม า : World Bank database สามารถดาวน์โ หลดได้ท ี่


ASEAN is becoming an increasingly important FDI destination Proportion of FDI destined in ASEAN (%)

Source: World Investment Report 2012.


Thailand’s FDI share is below her GDP share GDP share (2006-10) FDI Share 200610 Veitnam; 11.68 Brunei; 0.66Cambodia; 1.19 Indonesia; 13.39

Pao PDR; 0.4 Vietnam; 8.84

Thailand; 13.83

Brunei; 0.71 Cambodia; 0.97

Thailand; 19.39

Malaysia; 11

Indonesia; 32.69

Myanma

Singapore; 9.08

the Phillipine

Lao PDR; 0.48

Malaysia; 13.87 the Philippines; 11.6 Myanmar; 2.38

Singapore; 42.8

Source: World bank database

Source: ASEAN Investment Report 2011


FDI into ASEAN flows mainly into the service s ector 100% 90% 80% 70%

5430%

5401%

5583% 5133% 5715% 5352% 7095%

6025%

5352% 5105%

6569%

60% 50% 40% 30%

5303% 4510%

20%

3335% 4500% 4885% 3358%

2846%

10% 0%

4113% 4791% 4223% 4599%

59% 2000

-704% 2001

304% 2002

77% 2003

Agriculture

61% 2004

49% 2005

59% 2006

Manufacturing

640% 2007

148% 2008

Services

Source: ASEAN Investment Report 2011.

10% 2009

73% 2010


FDI into Thailand is heavily concentrated in manufacturing

FDI share

GDP share

Agriculture 8.3

Agriculture 0.09

facturing

Service 50.53 Manufacturing 58.73

แหล่ง ที่ม า: ASEAN Investment Report

Service 41.17


Singapore is the “ASEAN Gate Keeper” USD 3.14 billion

USD 17.66 billion

แหล่ง ที่ม า: ASEAN Investment Report 2011. (AVERAGE FDI FLOW DURING 2000-2009)


Observations • Since Thailand has a relatively restrictive FDI regime, foreign capitals f low through Singapore • In future when AEC is realized, Thailand stands to receive only “secon d hand FDI” from Singapore.


3. Challeng es


How to increase service sector productivity ? 1. Relax FDI restrictions to promote much needed transfer of technology into the service sector. 2. Revise domestic sectoral regulations that harm competition 3. Revise rules and regulations that discourage FDI.


3.1 How to liberalize ? 1.Thailand needs a “Roadmap” for service liberalization 2.The Foreign Business Act 1999 needs to be amended by (1) changing the list 3 from positive list to negative list (2) identify sectors that warrants protection based on benefits to the economy and not to the specific industry 3.Take steps to liberalize the following sectors: •. Services supporting the manufacturing (finance and banking, insurance, transport, telecommunication and energy) •. Services that are monopolistic or oligopolistic


Services targeted to be liberalized service Number of Name of operator Market share operator Energy Purchasing and sales of gas Import of LPG Gas transportation Gas distribution

1 1 1 3

PTT. PTT. PTT. PTT.

100 100 100 100 (including subsidiaries)

Energy Electricity Generation

5

EGAT

1

EGAT

82 (including subsidiaries) 100

1

EGAT

100

1

บมจ. ไทยคม

100

Purchasing and sales of electricity High voltage electricity transmission Telecom Satellite


3.2 Reform at the sectoral level


3.2 Reform at the sectoral level (2)


• •

•

3.3 Revise rules that discourage FDI

Lift the 4 to 1 rule governing the hiring of foreign nationals Relax restrictions on certain professionals such as lawyers or engin eers Shift investment incentive rules from L-intensive manufacturing-based to ski ll-intensive service-based industries.


4. Conclusion & Recommendations


Labour productivity in manufacturing and services ($ per person per annum)

120000 100000

99379 86417

80000

The Thai economic structure mimics that of relatively le ss developed coun tries

60000

43622 43373

40000

16832

20000 0

35025

Singapore

21900 11021

Thailand

Service

23057 8819

Indonesia

Manufacturing

Source: IMD World Competitiveness Yearbook 2012


Service sector reform will help Thailand escape mid income trap ‌ Attract foreign dle K&

technology + dissolve monopolies and oligopolies

Capital & Technology help boost labour productivity Wage of roughly 20 million workers improve Services become more efficient

Manufacturing sector regains competitiveness


Thank you very much !!!

Deunden  
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