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Thai Economic Recovery Still Driven by Export Growth, World Bank Says

June 24, 2010

BANGKOK, June 24, 2010 – Exports – the single engine driving Thailand’s economy in recent years – are likely to help the country sustain its recovery throughout 2010, said the World Bank in a report released today. Over the long run, however, it is important that Thailand develop an additional engine of growth to reduce its vulnerability to external economic shocks in the future.

To achieve that, the World Bank recommends that Thailand create more higher value added jobs in services and manufacturing. It also suggests that Thailand maintain the prudent fiscal policies, which have helped cushion some of the impact of the global recession during 2008-2009.

In Thailand Economic Monitor June 2010, the Bank slightly lowered its forecast for Thai GDP growth this year to 6.1 percent from the previous 6.2 percent. This was due to stronger than expected first quarter export performance, which offset much of the loss from tourism and consumer/investor confidence due to the domestic political turmoil.

With that, the Thai economy will have recovered nicely from the 2.3 percent contraction last year. The strong recovery was driven largely by solid demand for Thai exports, especially from within East Asia. However, the Bank warned that Thailand’s economic outlook in 2011 may be less buoyant. It expects a GDP growth of 3.6 percent, citing the slow recovery in the more advanced economies and the weak domestic demand in Thailand.

The good news is that Thailand continued to see a robust economic recovery in the first two quarters of 2010 despite the political turmoil,” said Frederico Gil Sander, a World Bank economist in Bangkok. “The bad news is that the Thai economy is still very much sensitive to external conditions.”

With most growth fueled by exports, the recent domestic political turmoil has had limited impact on the Thai economy. Tourism did suffer, but that sector accounts for only about 8 percent of the GDP, compared with manufacturing’s 39 percent share.

However, the social impact may be more significant given the large number of workers in tourism and retail trade, where livelihoods depend on consumer confidence and continued tourist arrivals. In addition, those relying on income from the agriculture sector have been adversely affected by the ongoing drought and the declining rice prices.  Together, these sectors employ about 61% of the workforce.

Need to keep prudent policies and find second engine of growth

The Bank noted that Thailand entered the global crisis with manageable levels of public debt and high levels of foreign reserves, and Thai corporations and commercial banks were in good health financially. This has afforded Thailand a lot more flexibility than many other countries to implement economic stimulus policies during the downturn. One way to maintain these conditions is for the government to eventually reduce budget deficits, the Bank recommends.

While recovery in external demand has helped steer the Thai economy through domestic turmoil, relying on exports as the single engine of growth makes Thailand much too vulnerable to the economic and financial troubles elsewhere. It also limits the country’s growth potential.

Although resolving the political crisis could help revive domestic investment and boost consumer confidence, the Bank said that alone would not be sufficient for Thailand to sustain economic growth in the long run.

To strengthen its resilience, the Bank recommends that Thailand encourage higher value added services and manufacturing. Over the last decade, services have been shrinking as a percentage of GDP, even though the services sector has strong potential to become another source of growth. Meanwhile, being able to perform higher value added tasks of manufacturing would enable Thailand to compete better in the increasingly globalized and knowledge-based world economy. The resulting higher-paying jobs in these sectors would also strengthen domestic demand in the long run.

To ensure that workers have the right set of skills to perform higher value added tasks, it is important to increase access to high-quality secondary and tertiary education, the Bank noted.

However, there is strong evidence that access to good universities in Thailand is still linked to income level. Because employers are willing to pay higher salaries for workers with more years of education, unequal access to tertiary education becomes one cause of the persistent income disparities in Thailand. It also limits the supply of skilled workers in the labor market, the Bank noted in this report.

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