Thailand Should Not Rush to Be a Service-based Economy

Countries across the world are scrambling to mitigate the impact of Trump’s tariffs. Economic restructuring, particularly the pursuit of new engines of growth through a shift from manufacturing to services, has emerged as a popular policy response. However, given Thailand’s sizable manufacturing sector and its active engagement in global manufacturing value chains, a hasty pivot to a service-based economy would be counterproductive. Instead, Thailand should double down on manufacturing and strategically develop services that directly support its growth.

In the past few decades, many countries have relied on export-oriented industrialisation as a key driver of economic growth. This has been accompanied by structural transformation – that is, the movement of workers from agriculture to manufacturing to services. This pattern has been observed in many high-income countries and is now unfolding in several developing economies in Asia, including Thailand, Malaysia, and Vietnam. In the case of Thailand, manufacturing employment grew sharply from 541,000 workers in 1960 (4 per cent of the total workforce) to over 4 million in 2000 (14 per cent of the workforce). Job growth in manufacturing outpaced all other sectors; by 2018, manufacturing accounted for 17 per cent of total employment. Concurrently, manufacturing’s share of GDP grew from 27 per cent in 1990 to a peak of 31 per cent in 2010, before declining to 25 per cent by 2023.

Manufacturing is dominated by three key industries — electronics, automobiles, and processed food products — which also serve as important sources of export earnings. The benefits of manufacturing extend beyond its contributions to GDP, employment, and exports, encompassing spillover effects on poverty reduction, innovation, regional development, as well as the expansion of business services (e.g. R&D, quality control, consulting, logistics, and maintenance).   

While manufacturing has been Thailand’s primary economic engine, in recent years, the Thai government has actively promoted a shift toward a service-based economy. One notable example is the Thailand 4.0 initiative, launched in 2017 by former Prime Minister Prayut Chan-o-cha’s military regime. This plan seeks to restructure the economy by emphasising innovative sectors such as digital services, wellness, creative industries, culture, and other high-value services. The Paetongtarn administration, in power since the 2023 election, has maintained the agenda and added priority sectors and projects, most saliently the development of an “entertainment complex” that will provide a variety of experiences and activities, including amusement parks, festivals, and casinos.

Thai “soft power”, heavily promoted by the government through films, dramas, series, and other cultural content, is seen as a new driver of economic transformation. These policy developments demonstrate a strong and sustained emphasis on the service sector across governments of different political orientations. This shift comes at a time when labour-intensive, export-oriented industrialisation now faces challenges such as stagnant productivity, rising labour cost, and intense competition from countries with cheaper labour and less stringent regulations.

What’s wrong with the turn to services? Given Thailand’s current position at the medium end of global manufacturing value chains (GMVC), picking certain service sectors and leaving manufacturing behind could put the brake on industrialisation too early. This would turn Thailand into a service-based economy before it has attained high-productivity, high-value added industrialisation, a phenomenon Dani Rodrik calls “premature de-industrialisation.” Theoretically, a maturely industrialising economy would accumulate know-how and hardware, and establish international networks of parts and components production, then graduate to higher value-added sections of GMVCs.

A premature shift toward a service-based economy, while opportunities for industrial upgrading still exist, risks forfeiting the long-term benefits that manufacturing can offer.

To reap further gains from industrialisation, Thailand should upgrade its production process in key manufacturing sectors, capitalising on the comparative advantages of established networks, skilled labour, precision assembly, and industry clusters in special economic zones located near deep-sea ports. For example, in the semiconductor industry, Thailand is primarily involved in back-end operations, such as assembly, packaging, chip assembly, and wafer dicing, while most of the value added occurs in front-end activities, especially wafer fabrication. Last year, Thailand’s Board of Investment approved an investment project by FT1, a joint venture by state-owned oil and gas group PTT with Hana Microelectronics. While this is a good starting point, further government support is required, for instance, in providing subsidies for manufacturers, building infrastructure, and promoting a skilled workforce. A premature shift toward a service-based economy, while opportunities for industrial upgrading still exist, risks forfeiting the long-term benefits that manufacturing can offer.

Services cannot thrive in isolation. Policymakers’ tendency to draw a sharp distinction between manufacturing and services overlooks the integrated nature of global value chains, where services serve as “intermediate inputs” into manufacturing. For example, telecommunications and IT services enable coordination across borders, while logistics and transport services facilitate the movement of raw materials and intermediate goods. Modern manufacturing also includes after-sale services, maintenance, and product customisation. This feature, known as “servicification” of manufacturing, refers to the growing integration of services in all stages of the manufacturing process — before, during, and after production. Today, manufacturing is not simply about producing physical goods in factories but also involves a range of service activities.

Take Thailand’s automotive industry as an example. Often referred to as the “Detroit of Asia,” Thailand serves as a major automobile hub for the region. Thailand has specialised in both final automotive assemblers and manufacturers of automotive parts. The supply chain also includes after-market services such as parts replacement, vehicle maintenance, and warranty services. The industry directly employs around 350,000 formal Thai workers. In addition, related aftermarket services employ an additional 600,000 people. The small- and medium-scale firms operating these services thrive because of the presence of manufacturing in the first place. In this context, the rising share of services is largely driven by manufacturing growth; emphasising that growth requires complementary development in both sectors rather than substituting one for the other.

Amid global trade tensions, countries reliant on trade are seeking new growth strategies. While services are often seen as the next engine of growth, it is important to assess whether this shift undermines manufacturing — a sector where many developing countries, including Thailand, have a comparative advantage. Instead of rushing to move to a service-based economy, Thailand should maintain and upgrade its well-established manufacturing, while strategically enhancing industry-linked services.

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