Saturday, March 12, 2011

Five forces that will shape Thailand in the next five years

Turn on any news channel these days, and you may not find it easy to sleep peacefully at night. Deepening crisis in the Middle East and North Africa (MENA), high and rising global oil and food prices, mob rule, and political protests: the news can quickly kill any positive thinking.

But if you turn your gaze from the near-term political and economic picture for a moment, and instead focus on the horizon, emerging into view are five forces that will shape Thailand's socio-economic perspective in the next five years. Not to be confused with Porter's five forces (a framework for business and industrial analysis), Thailand's five socio-economic forces are:

1. The global economy
2. High commodity prices
3. Increasing competition
4. Lowering competitiveness
5. Geopolitical factors

The actions of the first force, the global economy, are quite easy to foresee. One does not need a crystal ball - or sophisticated economic model, for that matter - to have a clear picture of what lies ahead.

Three current factors, especially relating to the so-called developed world, give a strong indication of the future global economic perspective: a) the deteriorating fiscal position due to high public debt in industrial nations, b) the persistently high commodity prices, and c) the ageing population - the result of effective birth control and medical advances.

The combination of these factors will lead to lower productivity growth and stagnant economies in the developed world. As a result, consumption will fall, which will lead to lower demand for imports from Thailand. Hence, Thailand's dependence on exports as a source of growth will be hit, whether we like it or not.

The second force, high commodity prices, is no passing trend but instead a permanent feature. The lack of infrastructure and technology to increase supply in the near term, combined with the risk of supply disruption (especially from natural disasters), and the rising demand in the emerging market will inevitably put pressure on the price of a whole range of goods - from "hard" commodities such as oil, steel and iron ore, to "soft" commodities such as rice, wheat and cotton, to name but a few.

This will unavoidably lead to higher inflation, which will in turn lower the purchasing power and quality of life for ordinary people, especially the urban poor. Arguably, the net impact of rising food prices to Thailand is hard to quantify, since we are a "food surplus" country (or net exporter of food). However, our lack of a public policy to increase productivity means that our agricultural sector is still at the mercy of Mother Nature.

The third force - increasing competition and a harsher business environment - is partially caused by the trend of trade openness, which will accelerate in 2015, when Thailand becomes part of the newly established Asian Economic Community (AEC).
The creation of the AEC will change Thailand's business environment in several ways. For example, it will bring a higher degree of competition from foreign businesses in the service sector - especially in industries such as legal consultation, packaging, food retailing, and hotel/resorts.

Moreover, we might face the problem of a "brain-drain", with neighbouring countries already offering much higher compensation to accountants, legal consultants and medical personnel. As a result, Thai entrepreneurs may have to boost pay structures for this high-skilled sector, which will inevitably lead to higher wages and costs.
The forth force is lowering and declining competitiveness due to the lack of public investment for infrastructure. The evidence of this lack includes our percentage of total investment to GDP, which is as low as 20 per cent - well below those of Asia's rising stars China, Vietnam and India, where it ranges from 30-40 per cent. Thailand also lags far behind China, South Korea and Malaysia in the World Bank's performance index and its ratio of R&D expenditure to total GDP. As we all know, investment in infrastructure and R&D are the seeds of sustainable growth. The lack of such seeds, whether due to political instability or absence of policy continuity, will drag our country's competitiveness down in the long run.

The last force, the geopolitical factor, can be regarded as a wild card. Foreign political unrest in the MENA region, the situation in the Korean peninsular, and the risk of international terrorism, are key factors that will effect investors' perception, financial assets and commodity prices. On top of that, the political instability still at play after the crackdown in Thailand will play a major role in shaping the domestic political scene in the near future.

These five forces are the major factors that will shape Thailand in the next five years. Businessmen, entrepreneurs and policymakers alike will need to keep these forces in mind when planning and taking decisions. By Piyasak Manason vice president for research and planning at Kiatnakin Bank. The Nation, Bangkok

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