Overcoming Thailand’s Regional Economic Challenges

Preparing Thailand for Asia’s single-market community will require better collaboration between lawmakers and business leaders.
The pace of growth in the global economy is now clearly segmented between the stagnant Western economies and Asia's emerging markets. Even so, Thailand, more than other growing Asian markets, faces challenges ahead. The Thai Chamber of Commerce predicts, at most, five percent growth after this year’s devastating floods . The recovery for Small and Medium Businesses (SMEs) will not be easy but it will occur gradually. SMEs are an integral component of Thailand’s economy and comprise 78 percent of employment, 43 percent of non-agriculture GDP, and 30 percent of exports. Preparing Thai executives for a new regional commercial environment by improving education and strengthening collaboration between policymakers, SMEs, and the regional organizations will make long-term growth and competitiveness much more likely.The Association of Southeast Asian Nations (ASEAN) is enjoying impressive growth rates and is looking to the next phase of regional integration by 2015 under the ASEAN Economic Community (AEC) Blueprint. The AEC aims to create a single market and production base for ASEAN. This includes the free flow of goods and services, capital, skilled-labor, and investments, thereby increasing competition in the region. It will build on the accomplishments of the ASEAN Free Trade Area by eliminating non-tariff barriers and forming an ASEAN Single Window. The Single Window will harmonize rules of origin and standardize customs procedures. The expected result is lower transaction costs for businesses and increased economic dynamism in the region. These developments will make the ASEAN bloc more competitive in the global economy.However, the AEC plan faces a critical issue—the lack of private sector involvement. Particularly among SMEs in Thailand, company presence beyond national borders is largely absent. SMEs are either unaware or do not have the capacity to carry out hefty research projects to fully understand and take advantage of the AEC in their industries. While studies have shown that calculated subsidies in research and development yield positive effects, the trifling amount of investment that goes into R&D, which is only 0.25 percent of GDP, prevents SMEs from innovating. High overhead costs, complicated rules of origin, and absence of ASEAN and trade specialists contribute to the overall malaise. Education Minister Woravat Auapinyakul has admitted that the system has not sufficiently prepared the workforce to meet the demands of regional competition and that the private and public sectors need greater awareness of the advantages the AEC will bring. According to the Franchise & License Association, 80 percent of franchise businesses will not be ready for the implementation of the AEC Blueprint due to the lack of knowledge in trade processes and language skills.In another sign of weak adaptability, a report by the Organization for Economic Cooperation and Development finds that while Thailand has the highest level of entrepreneurship in the world and is on par with international standards for best practices, the domestic business growth this has fostered has outpaced its supporting sectors. For example, inadequate government spending in physical infrastructure has driven transport related costs to 20 percent of GDP, higher than the global average. Transportation suffers from lack of railway transport, lack of storage facilities, poor roads and port congestion, thus negatively impacting export-oriented firms.The Thai government’s Office of SME Promotion (OSMEP), while trying to support these enterprises through cost-effective measures, remains limited in its ability to do so. OSMEP is tasked with increasing manufacturing output, supporting small firms in market entry and promoting finance and human capital development. What OSMEP lacks is operational space. It reports to the Office of the Prime Minister, but remains a small agency that piggybacks on the Ministry of Industry. Similar agencies that deal with SME policy formulation also exist throughout the bureaucracy; however there are no consultation meetings and best practices are not shared. This arrangement prevents centralized decision-making by OSMEP.There is a growing need for deepened public-private partnership to lay the groundwork for the AEC. SMEs and OSMEP must articulate concerns to Thailand’s Ministry of Foreign Affairs to raise during AEC negotiations. OSMEP should increase its efforts in assisting SMEs in understanding harmonized regulation in ASEAN and how to benefit from the removal of non-tariff barriers. Lastly, CEOs and managers need to become better acquainted with the multidimensional aspects of their businesses and industries and how they can best benefit from the new commercial environment. This can be accomplished by contributing and paying close attention to international institutions such as the ASEAN Business Club, which was recently formed by a group of ASEAN business leaders who sought to fill the void of private sector involvement in the AEC. A primary objective of this organization is to influence foreign policy to better address business community concerns. Business acumen in the AEC is much needed. Initiatives like the ASEAN Business Club promote an important knowledge resource and forum for firms that will have to gear up to meet the new competition and challenges of regional integration.Thailand has graduated into the middle-income group of countries. To avoid the notorious "middle income trap," whereby growth stagnates due to overreliance on cheap manufacturing and low wage labor, domestic and foreign policy must work in concert with businesses and regional institutions to ensure the private sector is ready to take full advantage of the new trade regime. The government must maintain a consistent foreign policy and not backtrack on its commitments to trade.Chayut Setboonsarng graduated from the Elliott School of International Affairs International Trade and Investment Program in May 2011.Photo courtesy of lecercle via Flickr.