The Future of Thailand in ASEAN

Thailand’s trade has expanded in both directions for the first time since April 2013. In year-on-year comparisons, both imports and exports have increased. In the Ministry of Finance’s most recent report, June yoy comparisons show the total value of exports is up by 3.9% with improvements in both intra-ASEAN and European trade. After signs of slowing this past year, producer and consumer confidence now appears to be improving.

Though the ASEAN Economic Community (AEC) deadline of full regional economic integration by 2015 is now unlikely to be reached, improvements in the Thai economy were spurred on by the AEC’s promise to ‘transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital.’

Thailand has led this process of integration and benefited from the near elimination of tariffs between Indonesia, Malaysia, the Philippines, Singapore, the original ASEAN-5, since 2010. McKinsey’s most recent report on sustained economic growth in Southeast Asia highlights key areas of improvement for ASEAN, particularly the need to improve labour productivity which still remains low.

For Thailand, however, the forecast remains fairly optimistic. While variations in standard and regulations between countries in the region continue to limit intra-ASEAN trade, integration is proceeding faster for traded goods, particularly in textiles, wood, and the automotive industry. The latter is particularly good news for Thailand and Malaysia who are becoming increasingly respected exporters of major vehicle and automotive-parts.

The dream of the “ASEAN”, with all parts produced and assembled in the region, was first floated in the 1980s and resurfaced last month when Malaysian Prime Minister, Najib Razak announced plans to launch a feasibility study in conjunction with Indonesia. The idea is appealing: ASEAN is the world’s 5th largest car market. But this campaign is also a positive signal for foreign investors in the automotive industry. Though McKinsey’s report emphasises restrictions to foreign investment and ownership as a trade barrier to the region, particular effort is being made to improve access to the industry.

Thailand already has a strong record on integration in the global economy, ranked a respectable 36th on the MGI Connectedness Index and a strong 12th in the Goods category, which quantifies participation according to flow intensity and share of world total. Indeed, Thailand is exempt from many of the vulnerabilities which McKinsey highlights across the ASEAN region. While Thailand has moderate restrictions placed on the levels of foreign ownership of equity in new investment projects, for instance, it has some of the highest levels of access to manufacturing.

Rising manufacturing costs in China means the sector has been growing in cheaper ASEAN countries, however, labour productivity in the region is still frequently criticised for being drastically lower than in China. On average labour productivity in Vietnam’s manufacturing sector is only about seven percent of that in China. Clearly, this must be addressed if ASEAN is to take advantage of this shift and capture a greater share of global manufacturing. Here, Thailand is proving itself ahead of other ASEAN member nations. Though fairly low, its labour productivity is at 37 percent of China, and has strong labour force participation – both are significantly higher than other countries in the region.

Another key area of improvement for ASEAN is their deployment of disruptive technologies which are poised to create substantial economic growth: mobile internet, big data, the automation of knowledge work, cloud technology and the internet of things. McKinsey calculates these five disruptive technologies have the potential to unleash some $220 billion and to $625 billion in annual economic impact by 2030.

These advances will help companies move quickly to digitise their operations and establish competitive positions. And Thailand is forging ahead in the internet of things, which involves digital tracking to check efficiency, supply chains and avoid excess inventory. Its water authority, for instance, has already implemented a system to consolidate data across all of its regional water systems to track supply, losses, customer use, and water levels during flooding.

Compared to Singapore, Thailand still has a relatively low base in terms of digital infrastructure but this is rapidly changing and improvements will have a significant impact on education, financial services and manufacturing. In Thailand and Malaysia, where labour costs are higher, this will contribute to the more sophisticated manufacturing capabilities needed to offset these costs.

Thailand will have to improve its value-adding operation in the sector if it is to magnify the recent upswing in trade figures and, in the long term, this will be dependent on the AEC’s success in implementing economic integration. Nevertheless, Thailand remains well positioned to benefit from the growth in an increasingly unified market.

Originally published as ‘Mckinsey Sees Room for ASEAN Improvement and Future Growth‘,  on ASEAN Briefing, 12 November 2014.

Image: Andrew B. Myers

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