Thailand Needs Economic Reform, Not Economic Stimulus

Following the pandemic-induced economic crisis of 2020-21, the new Thai government is preoccupied with raising the rate of economic growth. The contraction of GDP growth relative to its pre-crisis path was more pronounced in Thailand than in either Indonesia or Vietnam (Figure 1). The main reasons were Thailand’s greater export dependence in general and its heavier reliance on income from tourism, in particular. In early April, the World Bank downgraded its growth forecast for 2024 from 3.2 per cent to 2.8 per cent and also reduced its 2025 estimate marginally, to 3.0 per cent. The newly installed coalition government led by the Pheu Thai Party is urgently searching for ways to increase growth.

Figure 1: Economic Contraction and Recovery in Indonesia, Vietnam and Thailand

Increasing tourist numbers is one such opportunity. Srettha Thavisin, Pheu Thai’s Prime Minister since August 2023, has travelled extensively since his appointment, successfully marketing Thailand as a venue for a proposed international electric car rally and other special interest events. The government has also announced its interest in permitting casinos open only to holders of foreign passports and only within selected locations. Of course, this will not address the reported spending outflow from Thais travelling abroad for gambling. These measures are all intended to raise incoming tourist revenues. The government has announced a target of 40 million tourists in 2024, which would restore the number to about its pre-Covid level of 2019.

The Covid crisis did not merely reduce the number of tourists entering Thailand. Their average spending declined as well. Thailand’s balance of payments data reveals that spending per tourist has dropped markedly from pre-Covid levels. In the third quarter of 2019 (2019-Q3), tourists spent 45,700 baht on average. In 2023-Q3, it was 31,700 baht, a contraction of almost one-third, even in purely nominal terms. Restoring tourist numbers to their pre-Covid level will not fully restore income from tourism.

The recent experience of Japan demonstrates the ineffectiveness of macroeconomic stimulus as a growth-promoting measure.

The economic contribution of tourism is often exaggerated, with claims that it accounts for as much as 20 per cent of Thailand’s GDP. These claims mistakenly treat the total revenue received from tourists as if it were value-added. The value-added of an industry is the total revenue it receives minus the value of all the intermediate inputs it uses. GDP is the sum of the value-added of all industries. The true value-added generated by tourism in Thailand is unknown. It is surely large, but far less than 20 per cent of GDP.

Thailand’s poor growth performance started well before the Covid crisis. For the quarter century between 1970 and 1996 Thailand’s average growth rate of real GDP (adjusted for inflation) was above 7 per cent. GDP contracted during the 1997-99 Asian Financial Crisis (AFC), and over the quarter century since the AFC, growth has been around 4 per cent and falling. Soon after taking office, government representatives announced that Thailand was “crying out for economic stimulus” as a means of raising the growth rate. This is a mistake.

The great economist John Maynard Keynes taught the world that in circumstances where productive capacity is under-utilised, including unemployment of labour and unused plant and equipment, economic stimulus from the government can be an effective means of restoring demand and thereby restoring full employment. That is, for Keynes, fiscal and/or monetary stimulus were temporary stabilisation measures that could restore full employment in circumstances of insufficient demand. They were not instruments for raising long-term growth in the context of full employment. The Great Depression of the 1930s was, of course, Keynes’ focus at his time of writing, but his policy prescription also applied to the Asian Financial Crisis (AFC) of 1997-1999 and the Covid-19 crisis of 2019-2021. It does not apply in Thailand’s current circumstances of full employment. This is reflected in the current unemployment rate of 1.1 per cent, which marks a return to pre-pandemic levels; unemployment rose from 1.0 per cent in 2019 to 1.9 per cent in 2021.

The recent experience of Japan demonstrates the ineffectiveness of macroeconomic stimulus as a growth-promoting measure. Since the mid-2000s monetary expansion has pushed interest rates to previously unknown negative levels. Deficit spending has raised Japan’s government debt from 173 per cent of GDP in 2007 to 252 per cent in 2023. The outcome was an average annual growth rate over that period of 0.4 per cent. The lesson for other countries, including Thailand, is that fiscal and monetary stimulus are ineffective instruments for raising long-term growth.

Thailand’s current government has openly pressed the Bank of Thailand to reduce its policy rate of interest and is optimistic about the benefits of its “digital wallet” spending stimulus to domestic consumption. To its credit, the Bank of Thailand has so far resisted the pressure, and the digital wallet is stalled in legal problems for now. However, Thailand does not need a temporary stimulus to aggregate demand. It needs measures that will raise long-term productivity growth.

There are three main, inter-dependent reasons for the poor growth performance. First, Thailand has been politically unstable during the quarter century since the AFC. Business people do not like uncertainty about the rules of the game.

Second, private investment has slowed, partly but not entirely because of political uncertainty. Although foreign investment recovered quickly following the AFC and has remained robust since, investment by Thai firms in their own businesses is the dominant source of total investment in productive plants and equipment. Thai investors have remained cautious.

Third, long-term economic reform and educational reform have both been neglected. The needed reforms will generate long-term but not short-term economic benefits, net of adjustment costs. They will also produce immediate political problems. This helps explain their unpopularity with successive Thai governments, especially those led by populist political parties like Pheu Thai.

In addition to reforming the antiquated education system, the needed policy changes include reforming trade policy, where greater openness will contribute to long-term productivity growth, encouraging private investment by reducing the cost to businesses of complying with government regulations, and expanding government investment in the country’s congested public infrastructure. Instead of injecting short-term stimulus, the government must find the clarity and will to tackle productivity-raising economic reform.

2024/120