Global Economic Outlook: Implications for Thailand

Global Economic Outlook: Implications for Thailand

This morning I would like to share some views on the outlook of the global economy, what it means for East Asia, and what it means for Thailand. We see the global economy recovering; but we expect the recovery will continue to be slow.

The World Bank projects that the global economy will expand by 2.3 % in 2013 to 3.1% in 2014 and 3.4% in 2015. Along with global growth, we expect poverty around the world to decline. In 2010, just over 20 percent of people lived below $ 1.25 per day, in extreme poverty.  The World Bank Group has set a global target for that share to fall to only 3 percent of people in extreme poverty by 2030.

Developing countries in East Asia will continue to grow faster than other regions in the world. This year, we expect East Asia to grow by 7.3%, driven largely by China, which we expect to grow by 7.5% . Thailand is projected to grow by 4% this year and 4.5% in 2014. 

An important indicator of East Asia’s growth potential is that foreign direct investment (FDI) has surpassed pre-crisis levels. Prior to the Lehman Brothers crisis in 2009, East Asia had attracted around $200 billion of foreign investment per year. Today, foreign direct investment totals around $350 billion per year. China attracts around two-thirds of FDI flowing into the region.

Growing integration within the ASEAN Economic Community (AEC) will also support growth prospects in East Asia. The creation of a single market of almost 600 million people should ensure that Southeast Asia remains one of the most dynamic regions in the world. Of course there is still work to be done to implement the AEC agreements fully, especially on the services side. Still, the AEC will have a positive impact on growth. Just last week, when I met with a group of Thai business people, one shared with me his company’s plans for expansion within ASEAN beyond 2015.

East Asia faces external risks: volatile capital flows and exchange rates

Now, opportunities invariably come with risks. Capital flows to East Asia, indeed around the world, will remain volatile over the next couple of years. Capital flows into bond markets in East Asian developing countries were almost negligible prior to the Lehman Brothers crisis in 2009. They then rose rapidly to around $500 million per week by the end of 2012 – before dropping sharply in September, with outflows of more than $1 billion, triggered by events in the US: the “tapering” of Quantitative Easing announcement, the US government shutdown, and negotiations on the US public debt ceiling. And volatile capital flows have been reflected in the exchange rate movements. The Thai Baht first appreciated in real terms by 10% from April 2012 to April 2013, then depreciated by 5% from April to June this year.

East Asian countries also face home-grown risks. Household debt in Malaysia now stands at 80% of GDP while that in Thailand is at 70%. In China, debt of non-financial corporates has shot up to over 100% of GDP. This raises the vulnerability of those corporations (and banks that lend to them),

In addition to these short and medium term macroeconomic risks, several countries in East Asia increasingly face an important long term challenge: that of high and rising inequality. The available latest data show that income inequality as measured by the GINI coefficient in China is 47.8% and in the Philippines at 44.8%, and inequality has been rising there.    

Thailand Economic Outlook

Thailand has made an impressive transition from a low income country in the 1980s to an upper-middle income country by 2011. How can Thailand grow even faster and become a high income country?

Countries that have made that jump into the high-income-country league in the last few decades, such as South Korea or Taiwan, China, sustained growth averaging above 5% per year for 20 or more years.

Can Thailand follow suit? That’s the million dollar question. In fact, it’s the first of three questions I would like to pose today.

The second key question is: how can Thailand’s growth continue becoming more inclusive? Poverty in Thailand has fallen.  In 2000, 20% of Thais spent less on their basic daily needs than the national poverty line. In 2010 only 10% of Thais lived below the poverty line. 

And inequality has fallen too.  More and more Thais are benefiting from economic growth. The Gini measure of consumption inequality in Thailand fell over the last 20 years, from 42 percent in 1994 to 39 percent in 2010. This is good news.

The challenge is that inequality remains high, almost 40 percent consumption inequality is high by international standards.  And Thailand’s income inequality has fallen as well, but at 52 percent in 2010 remained the highest among East Asian countries.

How can Thailand reduce inequality further so that all Thais benefit from economic growth? I believe that improving education and skills will be essential for higher and more inclusive growth in the long run.   

Let’s look at the PISA scores. These scores measure the reading, math, and science skills of 15 year old students and they are a key measure of education outcomes of countries around the world. Thailand’s PISA scores are below the scores of OECD countries, and that they have stayed low over the last 10 years.

But the scores in Bangkok are comparable to those in the US. The key challenge is improving education outcomes outside Bangkok. In other words, it’s about education opportunities for all Thai students, especially those outside Bangkok. Over time, with improved, strong education outcomes, Thailand will be able to grow more rapidly.

I will conclude with the third key long-term challenge we see for Thailand, and indeed for East Asia and the world – that of climate change and environmental sustainability. 

In Thailand, one key issue is the energy intensity of the economy, and especially Thailand’s transport sector. Thailand’s transport energy intensity is currently one of the highest in the world among non-oil producing countries. It is more than twice that of China and more than 3 times that of South Korea and Japan.

One for the high energy intensity of Thailand’s transport sector is the heavy reliance on road transport.  More than 85% of freight transport is by road while only 2% is by rail. Envisaged transport infrastructure investments such as in the dual track rail and mass transit for transportation in Bangkok could help reduce energy intensity.  These investments are a major opportunity for Thailand.

In closing, I would like to highlight that I see many opportunities for Thailand in this thriving region. Opportunities for faster growth, more inclusive growth with improved education and opportunities for all Thais, and environmentally sustainable growth.

The World Bank is committed to being Thailand’s development partner as we have been for more than 50 years. We will be happy to work with Thailand and its people in the many years to come. Thank you very much.  Kob khun krub.