Service sector liberalisation ‘crucial’

The ADB blames constrained competition in the services sector for a failure of the Thai economy to reach its potential. 

“Thailand is lagging behind its peers,” Shang-Jin Wei, chief economist at the Manila-based ADB, said in Bangkok, referring to the market liberalisation and competitiveness of the Kingdom’s services sector.

According to the ADB diagnostic report “Thailand: Industrialisation and Economic Catch-Up”, the importance of the services sector increases as a country moves through the middle-income stage of development. 

In high-income economies in Asia and the Pacific, services account for about 70 per cent of gross domestic product. In Thailand, services last year accounted for 52 per cent of GDP.

The report says that as an economy grows and income per capita rises, the services sector caters to a growing middle class with increased purchasing power for hospitality, entertainment, tourism, health, education and personal services. 

“Thailand needs to deregulate the financial sector as well as the public utilities sector,” said Cyn-Young Park, assistant chief economist at the ADB. 

Public utilities such as electricity, gas, water and others are constrained by over-regulation and low competition, according to the bank. 

The ADB looked into services in trade, hotels and restaurants, transport and storage, real estate and dwellings, communication, finance, business services, public administration, community, personal and other services. 

There is high competition in some services in Thailand but overall, services have lost ground to industry, and productivity has been stagnant, says the report.

Shares of services in value-added of GDP fell from 50.9 per cent in 1990 to 43 per cent in 2010. 

Thailand’s service sub-sectors now make up a smaller share of value-added than in most comparative countries, the exception being hotels and restaurants. Thailand is falling behind, particularly in the critical area of communication, finance, and business services, where valued-add shares have fallen 3.6 percentage points since 1990, says the report. 

Business services – critical for productivity and innovation across the economy – play a small role in Thailand, accounting for about 6 per cent of total employment, the lowest among 17 Asian countries. 

 

Thailand lags in productivity 

While service-sector productivity is generally rising in Asia, Thailand is quite different. Between 2000 and 2010, annual labour-productivity growth in Thailand was 0.08 per cent, whereas in Malaysia it was 2.1 per cent and in India a hefty 7 per cent. For 12 Asian countries, the average was 3 per cent, according to the ADB. 

The legal limit on foreign equity in the services sector in Thailand is 49 per cent of total shareholding, compared with 51 per cent in Malaysia. 

According to the same ADB report, Thailand has successfully transformed itself into an upper-middle economy but its competitiveness and productivity have stagnated in recent years and it needs to embrace deeper structural reforms with supportive policies to become a high-income country.

“Thailand is now the second-largest economy in the Association of Southeast Asian Nations, and it is a major player in regional production networks for key manufacturing industries such as automobiles and electronics, as well as a regional hub for transport and logistics,” Wei said in the report. 

“Thailand can benefit from moving to higher-productivity activities and by creating more high-quality jobs through measures like more intensive research and development, greater investment in higher education, and a more level playing field for business.”

Although Thailand is now well integrated into regional and global production networks, much of its industrial technology is imported rather than home-grown and its R&D spending is only 0.25 per cent of GDP.

Thailand’s policymakers have many options to boost productivity and propel the economy up the global value chain, the study says. These include stepping up support for R&D with help from the private sector, promoting the country as a high-tech centre for global firms, and improving the enforcement of intellectual-property rights. 

Thailand trails many high-income neighbours in education outcomes, particularly in mathematics and science. To address the skill gaps, education spending should be raised above a minimum of 5 per cent of GDP, with greater focus on the quality of education in secondary and higher education and effective technical and vocational training, the ADB says. 

Regulatory constraints, including restrictions on foreign investment in the services sector, inhibit competition. At the same time, a number of public services, including key utilities such as power, natural gas, and water supply, are led by state-owned enterprises. 

Foreign ownership 

Raising foreign-ownership thresholds in services to the target set for the new Asean Economic Community and promoting competition in the public service sectors could significantly lift the country’s economic competitiveness with better chances of creating more quality jobs.

More infrastructure investment, especially in transport and logistics, is another pressing need for the country to leverage its growing role as a regional hub, the ADB study says. Thailand’s spending on infrastructure as a share of GDP has been falling since the Asian financial crisis, with significant under-investment in rail transport and telecommunication. 

In the dynamic regional economic setting, increased investments in transport in partnership with the private sector can help link Thailand more closely to its neighbours, allowing easy and low-cost movement of goods and people. 

Small and medium-sized enterprises, which make up 99 per cent of companies and account for more than a third of GDP, struggle to be productive and innovative because of a lack of access to credit, talent and technology. Assistance is needed for competitive SMEs to attract the capital and know-how they need to grow, provide quality jobs, and become more innovative. Among the steps that can be taken are expanding coverage of the public credit bureau, improving financing support services for high-potential SMEs outside the Central region, and providing help for medium to larger enterprises to carry out technology upgrades.