Thailand 4.0: in sight but not in reach
November 16th 2017
The Economist Intelligence Unit
"Thailand 4.0" is a sector-specific industrial policy that aims to attract new investment towards transforming the economy. The military government wants to move the country into a new era defined by innovative technology-based manufacturing and services. Although the 4.0 strategy is likely to succeed in attracting new foreign investment, the hopes that it will radically transform the economy, and with it lift the population to higher levels of prosperity, are overly optimistic even for the longer term.
Thailand 4.0 was unveiled by the junta in May 2016. This industrial policy is intended to complement the wider 12th National Economic and Social Development Plan, for 2017–21, and fit more broadly within the junta's new 20-year National Strategy, which was originally proposed in 2015. The junta has set out three aims for the 4.0 strategy: to elevate Thailand to the status of a high-income nation; to reduce inequality; and to promote environmentally sustainable growth and development. However, the government has yet to set out a clear timeline.
Towards a new era?
The strategy shares its name with the intended next stage in the sectoral development of the country's economy. The first stage, Thailand 1.0, describes the historical period when the economy was driven by agriculture; the next as when light industry with low wages came to the fore, such as with the rise of clothing and apparel production; Thailand 3.0 is defined as the current situation in which heavy industry with advanced machinery, such as in automobile and chemicals production, is among the most important drivers of the economy; Thailand 4.0 pictures the economy as digitally oriented and innovation driven, focusing on high-value-added manufacturing and services.
To this end, the 4.0 strategy will focus on ten strategic industries. This will include those currently found in Thailand but where value can be added via new technologies, encompassing smart electronics, high-income and medical tourism, agriculture and biotechnology, food and beverages, and automotive industries. It will also extend to developing industries that are new to the country, namely robotics, aerospace, digital services, bio-energy and bio-chemicals, and healthcare.
Special rules
At present Thailand lacks the domestic capacity to move forwards with many of the target industries, and so the success of the strategy will be heavily contingent upon the country's ability to attract foreign direct investment (FDI). New legislation came into force in February 2017 that expands incentives for foreign companies looking to invest in many of the target industries, including firms that use advanced production methods and materials, and digital technology. The incentives include corporate income tax exemption for up to 15 years, expanded shareholding options for foreigners, land-ownership options for investors and import-duty exemptions. An additional draw is the provision of subsidies from the newly created Fund for Enhancement of Competitiveness for Targeted Industries, which has a seed capital fund of Bt10bn (US$300m) to contribute to investment entailing research and development (R&D).
These enticements, specific to Thailand 4.0, are in addition to a raft of other incentives offered under the Eastern Economic Corridor (EEC), a new 13,000-sq-km special economic zone spanning three provinces east of the capital, Bangkok. Although investors will not have to base their operations in the EEC to be eligible for the Thailand 4.0 concessions, if they do so they may be able to access additional incentives. These include land-lease extensions, multiple-year corporate tax exemption, personal income tax reductions and environmental impact assessment fast-tracking. The EEC area will also undergo major infrastructure upgrading, which aims to expand the area's deep seaport and improve links between it, business parks, airports, the capital and adjacent coastal areas.
Tempting enough?
The incentives offered by the 4.0 strategy and the EEC alone are considerable, rivalling all past industrial policy concession packages, without taking into account the infrastructure improvement that The Economist Intelligence Unit expects to begin to be completed in the latter part of the forecast period (2018–22). However, fundamental issues in Thailand's economy go some way to explaining the extent of the incentives on offer—the authorities are in part attempting to counteract various conditions that have also led major Thai firms and conglomerates to invest elsewhere. Thailand has been suffering from below-par investment levels for some years and this partly explains why investment into R&D is so low, at the equivalent of 0.6% of GDP in 2015, compared with 1.3% in Malaysia and 2.1% in China, according to the most recent World Bank figures.
Scarcity of skilled labour is a major disincentive to FDI and an impediment to higher R&D spending. Although around half of secondary-school leavers enrol in tertiary education, the standard of education is low across multiple levels. The UN Educational, Scientific and Cultural Organisation (UNESCO) released its 2017/18 Global Education Monitoring Reportin October 2017. The report stated that at the completion of lower secondary education, just 50% of students had a minimum proficiency level in reading and only 46% in mathematics. It also stated that learning outcomes saw no improvement between 2003 and 2015. Compounding the skilled-labour shortage is the slowing growth of the labour force, which will begin to decline within the next decade.
Another impediment to attracting new investment is the lack of a lucrative domestic market for goods and services. Private consumption growth averaged just 2.8% a year in 2012–16, compared with 5.2% in Indonesia and 6.9% in Malaysia over the same period. This was owing to relatively high household debt combined with fragile consumer confidence for Thailand's economic prospects, intricately linked to the political uncertainty that still plagues the country. The prospect for a substantial improvement in this situation in the medium term is also limited in our view: we forecast that private consumption will grow by just 2.9% a year on average in 2018–22, amid slowly declining household debt and gradual wage growth.
Overall, the muted outlook for Thailand's economy, considering in particular the shortage of skilled labour and underwhelming domestic demand prospects, is likely to slow the uptake of the 4.0 strategy by foreign firms. We expect it to bring some success in the medium term in terms of increasing FDI, but the grander ambitions of ushering in a new era for the economy will not take root in the forecast period. A new wave of FDI will be a boost for the manufacturing and high-value-added services sectors, but outside particular industrial clusters Thailand's domestic capacities will continue to struggle, reflecting the deeply rooted structural problems in the economy that affect domestic demand, labour availability and investment.
"Thailand 4.0" is a sector-specific industrial policy that aims to attract new investment towards transforming the economy. The military government wants to move the country into a new era defined by innovative technology-based manufacturing and services. Although the 4.0 strategy is likely to succeed in attracting new foreign investment, the hopes that it will radically transform the economy, and with it lift the population to higher levels of prosperity, are overly optimistic even for the longer term.
Thailand 4.0 was unveiled by the junta in May 2016. This industrial policy is intended to complement the wider 12th National Economic and Social Development Plan, for 2017–21, and fit more broadly within the junta's new 20-year National Strategy, which was originally proposed in 2015. The junta has set out three aims for the 4.0 strategy: to elevate Thailand to the status of a high-income nation; to reduce inequality; and to promote environmentally sustainable growth and development. However, the government has yet to set out a clear timeline.
Towards a new era?
The strategy shares its name with the intended next stage in the sectoral development of the country's economy. The first stage, Thailand 1.0, describes the historical period when the economy was driven by agriculture; the next as when light industry with low wages came to the fore, such as with the rise of clothing and apparel production; Thailand 3.0 is defined as the current situation in which heavy industry with advanced machinery, such as in automobile and chemicals production, is among the most important drivers of the economy; Thailand 4.0 pictures the economy as digitally oriented and innovation driven, focusing on high-value-added manufacturing and services.
To this end, the 4.0 strategy will focus on ten strategic industries. This will include those currently found in Thailand but where value can be added via new technologies, encompassing smart electronics, high-income and medical tourism, agriculture and biotechnology, food and beverages, and automotive industries. It will also extend to developing industries that are new to the country, namely robotics, aerospace, digital services, bio-energy and bio-chemicals, and healthcare.
Special rules
At present Thailand lacks the domestic capacity to move forwards with many of the target industries, and so the success of the strategy will be heavily contingent upon the country's ability to attract foreign direct investment (FDI). New legislation came into force in February 2017 that expands incentives for foreign companies looking to invest in many of the target industries, including firms that use advanced production methods and materials, and digital technology. The incentives include corporate income tax exemption for up to 15 years, expanded shareholding options for foreigners, land-ownership options for investors and import-duty exemptions. An additional draw is the provision of subsidies from the newly created Fund for Enhancement of Competitiveness for Targeted Industries, which has a seed capital fund of Bt10bn (US$300m) to contribute to investment entailing research and development (R&D).
These enticements, specific to Thailand 4.0, are in addition to a raft of other incentives offered under the Eastern Economic Corridor (EEC), a new 13,000-sq-km special economic zone spanning three provinces east of the capital, Bangkok. Although investors will not have to base their operations in the EEC to be eligible for the Thailand 4.0 concessions, if they do so they may be able to access additional incentives. These include land-lease extensions, multiple-year corporate tax exemption, personal income tax reductions and environmental impact assessment fast-tracking. The EEC area will also undergo major infrastructure upgrading, which aims to expand the area's deep seaport and improve links between it, business parks, airports, the capital and adjacent coastal areas.
Tempting enough?
The incentives offered by the 4.0 strategy and the EEC alone are considerable, rivalling all past industrial policy concession packages, without taking into account the infrastructure improvement that The Economist Intelligence Unit expects to begin to be completed in the latter part of the forecast period (2018–22). However, fundamental issues in Thailand's economy go some way to explaining the extent of the incentives on offer—the authorities are in part attempting to counteract various conditions that have also led major Thai firms and conglomerates to invest elsewhere. Thailand has been suffering from below-par investment levels for some years and this partly explains why investment into R&D is so low, at the equivalent of 0.6% of GDP in 2015, compared with 1.3% in Malaysia and 2.1% in China, according to the most recent World Bank figures.
Scarcity of skilled labour is a major disincentive to FDI and an impediment to higher R&D spending. Although around half of secondary-school leavers enrol in tertiary education, the standard of education is low across multiple levels. The UN Educational, Scientific and Cultural Organisation (UNESCO) released its 2017/18 Global Education Monitoring Reportin October 2017. The report stated that at the completion of lower secondary education, just 50% of students had a minimum proficiency level in reading and only 46% in mathematics. It also stated that learning outcomes saw no improvement between 2003 and 2015. Compounding the skilled-labour shortage is the slowing growth of the labour force, which will begin to decline within the next decade.
Another impediment to attracting new investment is the lack of a lucrative domestic market for goods and services. Private consumption growth averaged just 2.8% a year in 2012–16, compared with 5.2% in Indonesia and 6.9% in Malaysia over the same period. This was owing to relatively high household debt combined with fragile consumer confidence for Thailand's economic prospects, intricately linked to the political uncertainty that still plagues the country. The prospect for a substantial improvement in this situation in the medium term is also limited in our view: we forecast that private consumption will grow by just 2.9% a year on average in 2018–22, amid slowly declining household debt and gradual wage growth.
Overall, the muted outlook for Thailand's economy, considering in particular the shortage of skilled labour and underwhelming domestic demand prospects, is likely to slow the uptake of the 4.0 strategy by foreign firms. We expect it to bring some success in the medium term in terms of increasing FDI, but the grander ambitions of ushering in a new era for the economy will not take root in the forecast period. A new wave of FDI will be a boost for the manufacturing and high-value-added services sectors, but outside particular industrial clusters Thailand's domestic capacities will continue to struggle, reflecting the deeply rooted structural problems in the economy that affect domestic demand, labour availability and investment.
