Three cures for the Thai productivity bug

Thailand has to overcome a major hurdle to reach the next stage of economic development: its worryingly low levels of productivity. Over a third of Thai GDP growth since 2006 has been driven by an expanding labour force, but the working-age population is actually forecast to shrink by 2030. To continue to raise living standards, Thailand will need an intense focus on productivity. In fact, the country will need to more than double its historic pace of productivity growth in order to maintain current economic growth rates. 

New research from the McKinsey Global Institute (MGI) finds that three trends offer major opportunities for Thailand to transform its productivity performance and build a future of broadly shared prosperity. 

1. Capturing a greater share of global trade and production: 

Thailand and its fellow Asean member states face critical choices regarding how they will trade and compete in a more interconnected global economy. In 2012, flows of goods, services, and capital across the world’s borders reached $26 trillion, or 36 per cent of global GDP. Southeast Asia can benefit from this global phenomenon by pushing ahead with the measures necessary to make the Asean Economic Community (AEC) integration plan a working reality. The AEC, which is premised on the freer movement of goods, services, capital and skilled labour across the region’s borders, aims to create an open market of 600 million consumers. MGI’s analysis finds that greater integration could create efficiencies that lower costs by up to 20 per cent in many sectors. Thailand has an opportunity to capture even greater benefit from global flows. Thailand currently ranks 36th on MGI’s connectivity index, which measures the inflows and outflows of goods, services, finance, people and data and communication, relative to the size of the economy. This is far lower than other Asean member states such as Singapore (which ranks 4th) and Malaysia (18th).

While full integration appears highly unlikely by the target date of end-2015 for the AEC, there has been real progress, including the near elimination of tariffs in many Asean countries. But other types of barriers – such as foreign ownership restrictions, varying product standards between countries, and inefficient customs procedures – are falling more slowly. Integration is proceeding faster for traded goods (particularly automotive, textiles and wood) than for services (such as finance and healthcare). Additionally, many local firms lack a sense of urgency about entering new markets and expanding their regional presence.

Simultaneously, as labour costs rise in China, Thailand and other Asean countries have an opening to capture a greater share of global production from multinationals. But attracting more foreign direct investment depends in large part on building a more competitive manufacturing sector. In Thailand’s case, its cost advantage in wages is seriously undermined by low productivity. In 2012, for instance, the average annual output for a manufacturing worker was 60 per cent less in Thailand than in China. To capture more of the upside of global flows, Thailand will need to focus on building awareness and preparedness of firms for Asean integration, streamlining logistics, and boosting workforce skills. 

2. Riding the urbanisation wave:

The rise of cities has gone hand in hand with strong economic growth in China, India, and elsewhere in the developing world – and similar forces are at work across Southeast Asia. Today roughly 38 per cent of Thailand’s population lives in cities of more than 200,000 inhabitants, a share that is likely to climb to almost 50 per cent by 2030.

Urbanisation is already generating economic growth, but Bangkok and other booming Southeast Asian cities are struggling to provide adequate housing, infrastructure and services to their growing populations. Twenty eight per cent of Thailand’s urban population currently lives in substandard housing. MGI estimates that Thailand will need to invest over $25 billion (Bt821 billion) annually in infrastructure to support economic growth, roughly three times its historical levels of spending. By adopting better project selection, more efficient construction, and strategies to maximise the life span and capacity of existing infrastructure, the Thai government can make its spending go up to 40 per cent further. 

3. Deploying disruptive technologies:

Recent MGI research identified 12 disruptive technologies that will transform the way business is conducted and the way individuals live and work on a global scale. A subset of these new advances will have particular relevance to Southeast Asia, given the region’s unique context and its social and business challenges. Technologies that can help to overcome physical distance and gaps in the logistics network could be particularly valuable to the region. The mobile Internet, for instance, could go a long way in bringing banking, education and healthcare services to remote populations. Big data, the so-called Internet of Things, the automation of knowledge work, and cloud technology are other disruptive technologies that could drive significant social and economic progress throughout Southeast Asia.

If the region can put the necessary backbone infrastructure in place, it could harness the power of technology to drive major productivity improvements. Many small local enterprises have limited access to IT services today, but cloud technology can allow them to begin using secure storage services, basic software and enterprise systems without tying up capital in their own IT systems that could quickly become obsolete. 

Thailand’s future prosperity will create a different growth model from that which has propelled the country historically. By taking advantage of global flows, the urbanisation process and new technologies, Thailand has an opportunity to transform productivity growth and broaden prosperity in the country.

 

This article is based on the latest McKinsey Global Institute report. McKinsey & Co authors Oliver Tonby and Fraser Thompson will be speaking at the Bloomberg Asean Business Summit today at Bangkok’s Grand Postal Building on Charoen Krung Road, Bang Rak.