Thailand needs economic reform, not stimulus

The government is seeking to inject short-term stimulus, but what Thailand really needs are measures that can enhance long-term productivity growth
Thailand’s new government should embrace long-neglected economic and educational reforms, even if these will prove unpopular in the short term

Peter Warr

Published: 11:00am, 27 Apr 2024

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Following the pandemic-induced economic crisis of 2020-21, the new Thai government has been focused on boosting the rate of economic growth. Thailand’s economic growth has fallen more than Southeast Asian neighbours Indonesia or Vietnam due to its high dependence on exports and the tourism sector. In April, the World Bank lowered its growth forecast for the country to 2.8 per cent this year, down from 3.2 per cent, and slightly decreased its 2025 estimate to 3 per cent. To address this issue, the Pheu Thai Party-led coalition government is actively seeking ways to increase growth.

One potential opportunity for Thailand is to increase its tourist numbers. Srettha Thavisin, Pheu Thai’s prime minister since August, has been actively promoting Thailand as a destination for international events such as an electric car rally. The government has also expressed interest in allowing casinos to operate in selected locations, but only for foreign passport holders. These measures are intended to boost incoming tourism revenue. The government has set a target of 40 million tourists in 2024, a return to the pre-Covid levels of 2019.

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The Covid crisis did not merely reduce the number of tourists entering Thailand, but also caused a decline in their average spending. According to Thailand’s balance of payments data, spending per tourist has dropped markedly from pre-Covid levels. In the third quarter of 2019, tourists spent 45,700 baht (US$1,235) on average. In the same period last year, it was 31,700 baht, a contraction of almost one-third, even in purely nominal terms. So it is important to note that restoring tourist numbers to their pre-Covid levels will not fully restore income from tourism.

The economic contribution of tourism is often exaggerated, with claims that it accounts for as much as 20 per cent of Thailand’s gross domestic product. These claims mistakenly treat the total revenue received from tourists as if it were value-added. In reality, the value-add of an industry is calculated by subtracting the value of all the intermediate inputs it uses from its total revenue. GDP is the sum of the value-add of all industries. The true value-add generated by tourism in Thailand is unknown. It’s undoubtedly significant, but far less than 20 per cent of GDP.

Thailand’s poor growth performance started well before the pandemic hit. During the period from 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, and growth has been around 4 per cent since – 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.

Street vendors prepare food for sale in Bangkok. The Thai government is optimistic about the impact of its proposed “digital wallet” spending stimulus on domestic consumption. Photo: EPA-EFE

John Maynard Keynes, the renowned economist, believed that when a country’s productive capacity is not being fully utilised, as reflected in unemployment and unused equipment, government stimulus can be an effective way to restore demand and achieve full employment.

According to Keynes, fiscal and monetary stimulus are temporary stabilisation measures that can restore full employment in circumstances of insufficient demand. They are not instruments for raising long-term growth in the context of full employment. Although Keynes originally wrote about the Great Depression, his policy recommendation also applied to other crises, such as the Asian Financial Crisis and the Covid-19 pandemic. However, this approach is not suitable for Thailand’s current situation of full employment, as reflected in the current unemployment rate of 1.1 per cent, which has returned to pre-pandemic levels. In fact, the unemployment rate increased from 1 per cent in 2019 to 1.9 per cent in 2021.

The recent experience of Japan serves as an example of the ineffectiveness of macroeconomic stimulus in promoting growth. Monetary expansion since the mid-2000s led to interest rates dropping to unprecedented negative levels. Deficit spending resulted in Japan’s government debt increasing from 173 per cent of GDP in 2007 to 252 per cent in 2023. The outcome of these measures was an average annual growth rate of only 0.4 per cent during this period. This serves as a lesson for other countries, including Thailand, that fiscal and monetary stimulus may not be effective in promoting long-term growth.

Thailand’s Prime Minister Srettha Thavisin gives a thumbs-up during a news conference providing details of his government’s plan to stimulate the economy by providing digital cash handouts. Photo: AP

The Thai government is urging the Bank of Thailand to lower its policy interest rate and is optimistic about the impact of its proposed “digital wallet” spending stimulus on domestic consumption. To its credit, the Bank of Thailand has so far resisted this pressure and the implementation of the digital wallet is currently facing legal issues. While the government is seeking a temporary boost in demand, what Thailand really needs are measures that can enhance long-term productivity growth.

There are three main, interdependent reasons for the poor growth performance. First, Thailand has been politically unstable since the Asian Financial Crisis, and businesspeople do not like uncertainty.

Second, private investment has slowed, partly but not entirely due to political uncertainty. Although foreign investment recovered quickly following the Asian Financial Crisis and has remained robust since, investment by Thai firms in their own businesses is the main source of total investment in productive assets. Thai investors have remained cautious.

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Third, long-term economic and educational reforms have both been neglected. These needed reforms will bring long-term economic benefits, but not immediate ones after considering adjustment costs. They will also produce immediate political problems. This helps explain why they have been unpopular with successive Thai governments, especially those led by populist political parties like Pheu Thai.

Along with revamping the outdated education system, necessary policy changes should involve reforming trade policies to promote long-term productivity growth through increased openness. This could be achieved by reducing the cost of government regulatory compliance for businesses to encourage private investment and expanding government investment in the country’s overburdened public infrastructure. Instead of injecting short-term stimulus, the government must find the clarity and will to tackle productivity-raising economic reform.

Peter Warr is a Visiting Senior Fellow at ISEAS – Yusof Ishak Institute, the John Crawford Professor of Agricultural Economics Emeritus at the Australian National University (ANU), Canberra, and Visiting Professor of Development Economics at the National Institute of Development Administration (NIDA), Bangkok. This article was first published by ISEAS – Yusof Ishak Institute’s commentary website fulcrum.sg.