Introduction
Thailand has an estimated population of over seventy million people. It is a country in Southeast Asia that has undergone a rapid economic growth rate in the recent past (Anon 1). The economic growth is a major determinant for any investor in making a decision on whether to make an investment in the country or not. In the past decade, the economy has been experiencing a positive economic growth rate estimated at 9%.
In conjunction with the economic growth rate, the government has decided to engage itself in numerous developmental activities for instance, infrastructure building, development of the financial sector, and technological advancement. Thailand is a low-cost manufacturing exporter and its workforce is well educated.
The rate of growth has so far being stable and it is expected to remain the same in the foreseeable future, although, it is still recovering from the crisis. Most of its products are exported to Japan and until that country recovers economically from the 1997 economic crisis, Thai economy may not be able to fulfil its promise. However, it has a strong service and manufacturing sectors that are likely to boost the economy.
This paper looks into the economic, social, technological, environmental, and political conditions in Thailand. It explains some of the risks that the country has been able to cope with whether it is prepared enough to deal with the risks that it might face in future.
Qualitative analysis
Domestic market
Structural changes have occurred in Thailand in relation to gross domestic product. The sectors that have grown most rapidly are construction, transportation and communication, manufacturing, electricity, services, and finance.
Lower rates of growth have prevailed in agriculture, mining, and trade. In terms of percentage shares, the most striking change has been a decline in the share of agriculture and a rise in the share of industry (Hoontrakul 1). The decline in agriculture is particularly striking because Thailand still appears to be primarily an agriculture country.
Exports are almost entirely agricultural, and about 80% of the labour force is employed in agriculture. However, the decline in agriculture is only a relative one; the money value of agriculture’s contribution to gross product has steadily increased, it has simply grown less fast than other sectors.
The following table shows the different economic indicators that reflect the current economic situation of Thailand.
(Table from; Social Science Electronic Publishing, Inc).
With this rate of economic growth, high GDP, high per capita income and low levels of unemployment business investments are likely to enjoy in the short and long term.
In the theory of economic development, great emphasis is placed on the size of investment and its share in the GNP. The ratio of gross fixed domestic investment to GNP hovered around 13% from 1952 to 1960, but then rose steadily reaching 24% in 1975. These high ratios on investment to GNP for Thailand have been challenged by several economists.
The rapid growth in GNP during this period implies a rather high investment ratio. This follows from the definitional relationships among the capital-output ratio, the investment ratio, and the rate of growth in GNP. If one assumes a given incremental capital-output ratio (ICOR), one can calculate the rate of growth in GNP that is consistent with a given rate of investment.
For example if ICOR is 3.0, and investment was 15% of GNP, the annual increase in GNP would be 5%. This value is already low, especially in view of the fact that much investment in Thailand has been in roads, dams, and other capital-intensive projects. If the estimates for GNP were increased and those for investment reduced, the result would be to reduce the already low values (Kochhar, 18).
Thailand has a well developed financial sector with the privatized and government participation. The banks are stable enough to sustain the growing economy. Micro finance institutions have emerged in the country giving support to the small scale traders who are distributed all over the country. Insurance companies are also a backbone of investment sector of an economy and Thailand is not left behind.
The insurance companies are stable enough and can handle big losses without going under. At the same time, there are reinvestment insurance companies in the country which help in maintaining stability even further. The banking sector has enabled firms to get loans at favourable rates (Hoontrakul 2).
External Economy
The economic crisis that hit the country in 1997 proved a lot about Thailand, it has been described as one of the countries in Asia that was able to record a sensible economic growth rate after the crisis.
This illustrate the stability of Thai economy, a good feature in any business venture, although its success depends on the economic recovery of Japan since most of Thai’s manufactured products are exported to this country (Hoontrakul 1).
The commitment to international specialization does require Thailand to expand its capacity to export if it is to sustain its momentum of growth. A reduction in foreign exchange receipts, for instance because of a fall in rice exports or a reduction in U.S> military activities, could force a contraction in domestic investment in order to bring imports down.
Similarly, plans for continued growth in investment expenditures may have to be scaled down unless exports grow. It is for this reason that a policy of promoting industries solely to supply the domestic market may create difficulties in the future. Thailand has developed some new export products, but its exports are still composed almost entirely of primary products.
Most of the firms in the small but growing manufacturing sector are producing only for the domestic market. Their production may replace imports, of course, but the scope for such import substitution is clearly limited.
Thailand’s major trading partners as at 2008 were:
In Thailand, the income elasticity of demand for imports is high, and the current account deficit typically expands during economic booms. If the public deficit was driving these events, one would expect to observe a positive relationship between fiscal impulse and the current account deficit. Between 1970 and 1977, the relationship between fiscal deficits and external deficits was positive.
However, after 1977, the relationship was clearly negative, owing to the fact that strong economic growth also generates higher tax revenue from business and sales taxes. Furthermore, increased imports also resulted in high tariff revenue. Since the strong economic growth was due to export and investment growth rather than fiscal stimulus, the unplanned fiscal impulse moved inversely with the current account deficit (Fu, 308).
The period of the early 1980s is controversial. From 1987 on, Thailand was enjoying an economic boom led as least in part, by external events. If adjustments were not demonstrably in place by then, some doubt must remain as to whether Thailand adjusted significantly at all. If not, then it might reasonably be thought that Thailand was simply lucky.
It could then be said that Thailand borrowed its way out of the need to adjust to the terms of trade decline of the 1970s and early 1980s and that it was saved from long-term consequences of this nonadjustement by an externally led boom beginning, fortuitously, about 1986 or 1987 (Kochhar, 24).
Thailand export/GDP ratio increased from 58% in 1987 to 83% in 1992. The import/GDP ratio was estimated at 57% in 2004. The share of goods imported from the United States was 5% of GDP, and the rest of the goods were imported from the rest of the world. At present, more than 80% of Thai’s export come are primary products and raw materials.
Thai exporters will have to work hard to sell more manufactured products if it is to remain competitive in the global market. It remains to be seen whether increased Japanese investment in Thailand’s export-oriented industries will improve prospects for overseas sales of the products. Thailand currently enjoys considerable comparative advantage in certain labour-intensive products.
But developing economies such as China, Indonesia, and Sri Lanka have abundant labour and much lower wage costs than Thailand. Thus Thailand will have to promote its manufactured exports in a world market that will be less open than previously due to rising trade barriers in importing countries, and more intense competition from developing economies.
Policy Instruments
Fiscal & monetary policy
At a theoretical level, fiscal policy is more likely to be effective under a fixed exchange ate regime than under a flexible exchange rate. The opposite applies to the monetary policy. Fiscal policy therefore seems a god candidate for a significant stabilizing or destabilizing role in the Thai context, as has indeed been suggested in the literature on Thailand’s adjustment experience.
Thailand’s consolidated public sector consists of the central government, local government, and the public enterprises. The fiscal position of the consolidated public sector is dominated by that of the central government. The deficits of the public enterprises have on average been smaller than those of the central government and have tended to move with them.
Local government deficits are insignificant. Thailand’s boom was fuelled by unprecedented levels of foreign and domestic investment. Overheating was avoided by means of a fiscal contraction in which large fiscal surpluses offset the domestic monetary expansion that would otherwise have resulted from the conversion into baht of the large current account surpluses in the hands of the private sector.
After 1990 this boom slowed, because of domestic political conflict and also the growing congestion of infrastructure facilities overburdened by the pressures resulting from the boom.
The ex-post fiscal deficit of the government has behaved countercyclinically in the short run. This is also true of the main instrument of Thai monetary policy, the bank lending rate set by the Bank of Thailand.
Both fiscal and monetary aggregates seem to have been expansionary during periods of low inflation and low growth, and contractionary in the reverse. The public sector borrowing requirement (PSBR) increased from 1.8% in 2001 to 2.2% in 2005 and then to 3.4% in 2008.
Exchange Rate Policy
Thailand has a strong banking sector and pegged its exchange rate for longer than most middle-income countries. Thailand has had a small, open economy with relatively low inflation during the past few decades. Thailand had some form of pegged exchange rate up until the financial crises of 1997.
Pegged exchange rates have been beneficial for such an economy, protecting export and import prices from volatility in the exchange rate. After defending the peg for such a long time, the Thai finance ministry let the baht float on July 2, 1997.
Short-Term Financial and Debt Variables
Short-term
A number of fiscal variables are potentially useful as univariate leading indicators for signalling crises on an annual basis. The best indicators are short-term debt, foreign currency debt, and various deficit measures. The insurance and the banking sectors thus have both a direct and indirect effect.
An example of a direct effect is the improvement on efficiency of these institutions and from an indirect effect empowerment of other sectors that trickle down to any business venture (Barney, 47). The following tables show short-tern financial and debt variables that can be used to explain the economic condition in Thailand.
Quantitative Analysis
The case of Thailand demonstrates the complexity of particular realities. It can be argued that the lack of policy polarization and uncertainty related to the coups in Thailand made its economy a success story, compared to some Latin American countries, where coups were the result of deep political cleavages and devastated the economies.
Alternatively, it can also argued, on the basis of a comparison between Thailand and other Pacific Asian nations, such as Singapore, Korea, and Taiwan, that political instability in Thailand did have some negative impact on its economy, though its damaging effect was far from that in Latin America.
China and Russia have adopted different sequences of political and economic reforms and have achieved different outcomes in their efforts to revitalize their economies. In comparing the economic growth and poverty in Indonesia and Thailand for the period of 1984-1990, it is clear that the poverty level in Thailand was higher than that in Indonesia (Antipolis, 2).
China has the second largest nominal GDP growth beside Korea, that is, over 20% within the sample period. In all other countries (including Thailand), most of the nominal growth can be explained by the increases in domestic prices. This price effect is found to be largest in the Philippines, where it explains about 90% of nominal GDP growth.
It is then followed by Hong Kong and Thailand, where the price effect contributed to more than half of the nominal growth. For China, the effect of price is found to be relatively smaller than these two countries; it explains about half of the nominal GDP growth.
Conclusion
The risk analysis described above can help in the determination of the Thailand market growth (or decline) and the implication of its strategic business unit. If an economic recession occurs, the economic forces may have a considerable bearing on the future market strategies through ripple effects on the political and socio-cultural factors.
Political factors put a restriction on the development of the industries by putting tough taxes and regulation requirements. However, through the above analysis, it is clear that Thailand is a viable country for any investor to consider venturing into it.
It has a strong economic position and also the political situation is stable. The fact that each country is willing to trade with it has set the country in a pace, now heading to be a political neutral country. As nations get more confident in the country, the more they will be willing to trade with Thailand and thus the market stands to gain
Works Cited
Anon. “Population and Housing Census 2000.” National Statistical Office, 2000. Web.
Antipolis, Sophia. “Thailand Country Risk Analysis.” Global Finance, 2007. Web.
Barney, Joseph. Gaining And Sustaining Competitive Advantage (3rd Ed.). New Jersey: Pearson-Prentice Hall, 2007.
Fu, Tsu-Tan. Productivity and economic performance in the Asia-Pacific region. Academic studies in Asian economies. Edward Elgar Publishing, 2002.
Hoontrakul, Pongsak. “The Competitiveness of Thailand: Economic Analysis from Competitiveness Reports.” Social Science Electronic Publishing, Inc., 2008. Web.
Kochhar, Kalpana. Thailand: the road to sustained growth. Issue 146 of Occasional paper. International Monetary Fund, 1996.