Asian Angle | Why Thailand failed to escape the middle-income trap
Despite early success, Thailand’s growth has stagnated – as flashy developments siphon resources away from innovation and productivity
The Asian financial crisis in 1997-98, which originated in Thailand, savaged the country’s economy, destabilised its banks and financial system, and set back its development prospects. It took Thailand nearly a decade to regain its pre-crisis level of GDP per capita. Since then, growth has averaged just over 4 per cent annually – too low for a middle income economy.
Foreign visitors to Thailand’s capital, Bangkok, are often surprised to learn about this stagnation. The city’s gleaming skyscrapers, luxury hotels and condominiums, high-end shopping centres and fine dining options create the illusion of a vibrant, innovative economy well on its way to high-income status within a decade or so.
A real estate glut
During a recent visit to Bangkok, I was struck by the proliferation of new luxury hotels and shopping malls compared to just five years ago.
The massive One Bangkok complex, for instance – developed in a previously rundown area by TCC Group, one of Thailand’s biggest family-owned conglomerates – is architecturally and aesthetically impressive. But one must question the development utility of such mega-projects. While they enhance the city’s visual appeal for residents and tourists, they are unlikely to contribute to Thailand’s long-term growth or innovation. They also exacerbate economic and spatial inequality, as older, more affordable neighbourhoods are replaced by expensive developments.
In developing countries, an abundance of luxury property often signals improper allocation of financial resources, with capital flowing into speculative activities that may be privately profitable but offer few benefits for overall development. The real estate sector typically does not enhance a country’s technological capacity or improve workers’ skills and productivity.
Worse, heavy investments in real estate are usually accompanied by rising corporate and household debt levels, creating asset bubbles. When these bubbles burst, the societal costs – including diminished wealth, lower consumption, taxpayer-funded bailouts, and economic setbacks – far exceed any short-term benefits, as seen in China’s current struggles.
More importantly, most jobs in tourism – whether in hotels and restaurants or arts and culture – tend to be less amenable to automation, limiting potential productivity gains compared to other sectors. Tourism is also less scalable as increasing the use of machinery to serve more customers often results in lower quality, which can in turn reduce demand.
Manufacturing concerns
An abundance of real estate development diverts crucial capital and resources – such as land and labour – from more productive economic activities.
While Thailand boasts a sizeable and reasonably competitive manufacturing sector, making up about one-third of its economy, it remains dominated by multinational corporations. Thai conglomerates primarily focus on agriculture, resources and less technology-intensive services, reflecting a common pattern in middle-income trap countries: local firms find it easier to succeed in less tradeable sectors like services, while manufacturing faces global competition.
Multinationals also typically invest little in research and development in developing nations due to a lack of hi-tech skills and scientific capabilities. This creates an intractable chicken-and-egg dilemma: the multinationals lack incentives to engage in advanced manufacturing without skilled workers, while workers have little motivation to acquire the requisite skills when there are few existing jobs that require them.
Political constraints
Such coordination challenges generally require government intervention, whether in the form of subsidies for research and development or incentives for students to pursue science and technology programmes. But a third constraint holds back middle-income trap countries like Thailand: politics.
Unlike those Asian economies that have successfully industrialised such as Japan, South Korea, Taiwan, Singapore, and more recently, China, Thailand lacks a strong political consensus on the criticality of economic restructuring and technology upgrades.
The country’s politics remain consumed by a Gordian Knot of deep-seated conflicts: between rich and poor, labour and capital, formal and informal workers, and the established conglomerates that dominate the services economy versus newer manufacturing and tech firms. And until a few years ago, between the “red shirts” and the “yellow shirts”.
These conflicts often stem from the policies or factors that enabled Thailand’s rapid growth from low- to middle-income status. But upon reaching upper-middle-income status, these issues now inhibit and impede the country’s development – detracting from the long-term task of technology development and economic restructuring.
Although there are competent technocrats in the Thai government, they find it immensely challenging to formulate sound economic policies for the long term in a political environment that is often myopic and highly polarised.
Donald Low is Senior Lecturer and Professor of Practice at the Hong Kong University of Science and Technology as well as Director of Leadership and Public Policy Executive Education.