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Thailand: Private Sector Assessment 2013 December 2013

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Thailand: Private Sector Assessment 2013 December 2013 Thailand: Private Sector Assessment 2013 December 2013 Prepared by Dr. George Abonyi for the Asian Development Bank. The views expressed in this publication are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), its Board of Governors, or the Governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences of its use. CONTENTS Page LIST OF TABLES, FIGURES, AND BOXES Abbreviations Currency Equivalent Acknowledgements Executive Summary I. INTRODUCTION 1 II. PRIVATE SECTOR ASSESSMENT 2 A. Macroeconomic Overview 2 1. Overall structure of the Thai economy 3 2. Macroeconomic context: recent developments 4 3. Implications for private sector development 7 B. Economic Inequality and Implications for Private Sector Development 8 1. Key issue 8 2. Implications for private sector development 10 C. Labor Market Conditions 11 1. Overview 11 2. Medium and short term: key trends and issues 11 3. Longer-term trends 14 D. Profile of the Private Sector and Business Environment 15 1. Corporate ecology 15 2. Corporate recovery after the Global Crisis 16 3. Context for performance: business environment 17 4. Financing private sector development: selected issues 20 E. Investment Patterns 24 1. Overview 24 2. Public and private investment 25 3. Challenges of infrastructure finance and role of public–private partnership 26 4. Foreign direct investment 28 F. Infrastructure and Private Sector Development 30 1. Context 30 2. Transport and logistics 30 3. Telecommunications 35 4. Water 36 5. Energy and power 38 G. Exports: misleading performance and emerging challenges 44 1. Thailand’s changing export mix: “stuck in the middle of the value chain” 44 2. Export revenues: misleading signal for future growth 47 3. Thailand’s changing market “mix”: new private sector challenges 48 H. Core Issue: Shifting to innovation-led growth 56 1. Introduction and overview 56 2. Assessment of Thailand’s capacity for innovation-led growth 58 3. Innovation revisited: implications for private sector development 78 III. STRATEGY ASSESSMENT 83 A. Government’s Future Strategy and Private Sector Development 83 1. Context 83 2. 11th Plan and Private Sector Development 83 3. Thailand Country Strategy (2013 – 2018) 85 4. Specific plans and initiatives for private sector development 86 IV. Conclusions 94 REFERENCES 117 CURRENCY EQUIVALENTS (as of 20 January 2014) Currency Unit – Baht (B) B1.00 = $0.0304551 $1.00 = B32.8352 ABBREVIATIONS ACI – ASEAN, China, and India AEC – ASEAN Economic Community ASEAN – Association of Southeast Asian Nations BOI – Board of Investment of Thailand CPS – country partnership strategy ECG – GE’s electrocardiogram EGAT – Electricity Generating Authority of Thailand EU – European Union FDI – foreign direct investment FTA – free trade agreement GDP – gross domestic product GMS – Greater Mekong Subregion IPP – independent power producer IT – information technology JPPCC – Joint Public and Private Consultative Committee MEA – Metropolitan Electricity Authority MNE – multinational enterprise MOF – Ministry of Finance MOST – Ministry of Science and Technology MWA – Metropolitan Waterworks Authority NESDB – National Economic and Social Development Board NGOs – Non-governmental Organisations NSTDA – National Science and Technology Development Agency OECD – Organisation for Economic Co-operation and Development PEA – Provincial Electricity Authority PPP – public–private partnership PRC – People's Republic of China PWA – Provincial Waterworks Authority R&D – research and development S&T – science and technology SFI – specialized financial institution SMEs – small and medium-sized enterprises SOE – state-owned enterprise SPP – small power producer TDRI – Thailand Development Research Institute TI park – technology and innovation park TSP Thailand Science Park UNCTAD United Nations Conference on Trade and Development US United States Acknowledgements This report was prepared by Dr. George Abonyi, ADB consultant, under the supervision of Winfried Wicklein, Principal Country Specialist, ADB Thailand Resident Mission. The report benefited from in-depth consultations with representatives from the private sector and the Government of Thailand. The author wishes to thank Dr. Pattama Teanravisitsagool and Ms. Montip Sumpunthawong of the National Economic Social Development Board (NESDB) for invaluable assistance and advice. Executive Summary I. CONTEXT: Thailand’s successful development model has run its course 1. Thailand has achieved remarkable sustained growth over an extended period, building on a rich natural resource base, driven by low-cost labour coming out of rural areas, supported by high levels of capital investment (prior to the Asian Crisis 1997), and facilitated by effective economic institutions. The Thai economy’s growth has been strongly market- and outward- oriented, with the private sector playing a central role in responding to international product market opportunities through impressive expansion and diversification of manufactured exports. The results included a combination of sustained growth, macroeconomic stability, economic diversification, and increase in the quality of life as measured by most non-economic indicators, including a dramatic decline in poverty. The Asian Financial Crisis eroded but did not erase Thailand’s gains from growth and development; and the economy generally recovered. 2. The Thai economy has recovered reasonably well from the Global Crisis of 2008. However, there are clear signs that Thailand has been losing its comparative advantage based on low-cost labour; and there are underlying weaknesses in Thai firms’ capabilities to compete in mid- and higher-technology processes and products. The basic challenge facing Thailand is the transformation of the economy from growth driven by manufactured exports relying on low- cost labour, to a knowledge-based economy broadly focused on value creation. Responding to the challenge requires strengthening the capacity of Thai enterprises, including (in particular) small- and medium-scale enterprises (SMEs), to upgrade and innovate – to develop new products, production processes, and business models in an evolving, and increasingly uncertain and volatile international economic environment. II. CHALLENGE: Loss of manufacturing competitive advantage 3. Product challenge: Thai firms have had remarkable success in diversifying products and production processes within sectors (e.g. in agriculture and manufactures), and across sectors (e.g. transition from lower productivity agriculture to higher productivity manufacturing). They have been much less successful in upgrading to higher value activities and outputs in key industries such as electronics, automotive and rubber. Thai firms, unlike enterprises in Northeast Asia (e.g., Republic of Korea and Taipei,China), have not used their low-cost advantage to build necessary capabilities to compete on the basis of increasingly higher levels of skills, technology, and knowledge. Although products exported have increased appreciably in diversity and sophistication, most Thai firms remain concentrated in assembly and relatively lower skill, lower technology, and lower value manufacturing processes. Partly as a consequence, manufactured exports, historically the key driver of Thailand’s impressive sustained growth and development, have stalled in recent years. 4. Market challenge: Thailand’s export markets are evolving in important ways, reflecting basic changes in the pattern of global growth, referred to as the “new normal”. The global economy is showing signs of continuing slow growth, and increased volatility in the wake of the Global Crisis (2008). The developed economies, Thailand’s traditional markets, are faced with slow and uncertain growth; while Asian emerging economies, are growing at a relatively faster pace, though more sluggish and uncertain than expected. This is linked, in part, to extensive global trade and financial imbalances and the related adjustments that will have to take place between surplus economies (i.e. People’s Republic of China (PRC) and Germany), and deficit economies (particularly the United States (US) and much of the European Union (EU)). 2 5. Role of PRC: The PRC’s emergence as the single largest export destination for many of the region economies, including Thailand, is seen as particularly important in the Asia becoming its own final market in the future. However, the PRC remains largely a conduit for importing parts and components from the region for assembly of final products for export to developed economies. The PRC’s role as a market for Thailand’s final goods is shaped not by the size or growth of its Gross Domestic Product (GDP), but its capacity to generate net demand for imports of final manufactures. Household consumption’s share in PRC’s GDP has been falling since 1990s from over 55% to an extraordinarily low of less than 35% in 2012. Reversing this, as targeted in the PRC’s present (12th) Plan, requires a shift in economic power away from state-owned enterprises (SOEs) and related firms, toward households and SMEs – more a challenge of political economy than economics. And, as noted, the PRC is a major importer of Thailand’s (and the region’s) exports of parts and components for its final exports to developed economies, e.g. iPhones to the US and EU; but not yet a major market for final manufactures. Around 60% of total imports are used, directly
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