Higher productivity growth in Thailand will be a key source of stronger economic growth and better competitiveness, according to the Thailand Manufacturing Firm Productivity Report, a joint research product of the World Bank and the Monetary Policy Department of the Bank of Thailand.
For Thailand to achieve its national development strategy target to transition to high-income status by 2037 and to recover from the COVID-19 pandemic's economic impact, it must accelerate structural reforms to boost investment and accelerate productivity growth of manufacturing firms. Thailand would need to sustain a long-run average growth rate of over 5 percent beyond 2025. Achieving this growth rate would require nearly doubling the current rate of both public and private investment to 40 percent while maintaining one of the fastest Total Factor Productivity growth trajectories, similar to that of South Korea when it was at today's Thailand's level of GDP per capita.
"A country's ability to improve its standard of living depends almost entirely on its ability to raise its output per worker, or producing more goods and services for a given number of hours of work For that, Thailand needs to promote the shift of labor away from low-productivity sectors, such as agriculture, towards higher-productivity sectors such as manufacturing," said Birgit Hansl, World Bank Country Manager for Thailand. "Increasing the productivity of firms within the manufacturing sector itself will also play a key role in job creation and more inclusive growth, particularly in the post-COVID recovery phase."
In the past decade, weak productivity growth has already stalled Thailand's economic growth momentum with economic growth falling from an average of 4.8 percent in 1998-2008 to 3.3 percent in 2008-18. The growth challenge is intensified by the COVID-19 pandemic, with the economy projected to contract by 6-7 percent in 2020 and the potential for longer term adverse economic impacts, including a further decline in productivity.
Following the Global Financial Crisis (2009-2018), industrial sector productivity growth in Thailand has halved from an average annual growth rate of 2 percent in 1998-2008 to 1 percent. Labor productivity in the industrial sector, measured in terms of value added per worker, grew at an average rate of only 0.5 percent in 2008- 2018 as compared to over 3 percent from 1998-2008.
"The findings from the study point towards a productivity agenda that focuses on enhancing competition in the domestic economy, increasing openness to foreign direct investments and promoting an ecosystem for firm innovation," according to Kiatipong Ariyapruchya, World Bank Senior Economist for Thailand.
The report's analysis highlights key findings on the type of manufacturing firms that are productive and on constraints to productivity: (i) Manufacturing firm productivity growth has been higher for firms that export more; (ii) Competition in domestically oriented industries is weak, contributing to lower entry of productive firms and less exit of unproductive firms, driving down overall productivity; (iii) Firms that receive FDI are more productive; ( iv) There are number of small, productive firms that are not growing in size; and (v) skills and R&D together matter for firm productivity.
Policy recommendations include implementing the new Competition Act with clear guidelines related to state-owned enterprises, price controls and cartel behavior. Promoting openness, by relaxing foreign direct investment limits and lifting services restrictions, and the strengthening of intellectual property protection, will be all crucial for attracting new investments and firms. Importantly, there should be a higher focus on skills development to meet the needs of an innovative knowledge-based economy.
