New strategies needed to deal with rising China, India

Policymakers should consider new strategies to enable Thailand to reap long-term benefits from the rapid economic growth of China and India, according to M.R. Pridiyathorn Devakula, the governor of the Bank of Thailand.

The rapid development of China and India could pose a considerable threat to the Thai economy, as low-cost labour and huge market size has resulted in heavy foreign-investment inflows and rapid expansion of trade.

"If we cannot improve our competitiveness by having the appropriate development strategies, sooner or later we will succumb and be overtaken by the countries that are behind us now," M.R. Pridiyathorn said in an opening speech at the central bank's annual economics symposium yesterday.

"I believe Thailand has the potential to match Singapore and Korea, if we can capitalise on the current trends in the region."

M.R. Pridiyathorn said the economic cycle would increasingly follow China and India due to their rapid growth.

He said Thailand's economy should post growth of 4-5 percent this year and 4-5.3 percent in 2007, a satisfactory rate given various negative factors.

Economic fundamentals remain strong, with high foreign reserves, robust export growth, declining levels of bad debt in the banking system and strong corporate profit growth.

"Declining private investment is the only weakness, as some businesses have delayed investment pending greater clarity of the political situation," M.R. Pridiyathorn said.

"Once politics stabilise, private investment will become a positive factor [for the economy] again."

M.R. Pridiyathorn said other key strategies to improve the country's competitiveness included new investment in infrastructure and policies to reduce income disparity.

He played down fears of a new economic crisis, as risk management in the private sector had improved since the 1997 crash.

The two-day annual symposium is held under the theme Positioning Thailand in the New Asian Economy, and features papers by central bank economists examining issues such as competitiveness policies, energy security and regional integration of the financial markets.

Runchana Pongsaparn, a central bank economist, said foreign direct investment had played a key role in the country's past export growth, particularly in the high-tech sector.

But investment had failed to result in added value for various industries. Sectors with the greatest potential included high technology, agriculture and textiles.

Pichit Phatrawimolpon, another central bank economist, said a survey of 350 listed companies showed net margins for exports averaged 10 percent, once production costs, foreign profit repatriations and royalties were deducted.

Ammar Siamwalla, an honorary economist at the Thailand Development Research Institute, said innovation was crucial for raising the country's competitiveness.

Thai firms now have a low level of innovation, resulting in low margins.

Sethaput Suthiwart-Narueput, a senior vice-president of the Stock Exchange of Thailand, said wealth distribution should be made a target for economic policy, as increasing export market share was not the sole factor for long-term development.

"Productivity, rather than competitiveness, should be the key target of economic policies. It is better to be more productive than others rather than more competitive," he said.

"Economic growth in the past came from high investment and the shift of labour from agricultural to industrial sectors, rather than through an increase in productivity."

Meanwhile, Yunyong Thaicharoen, a central bank economist, said relatively low oil prices, due in part to low taxes, had been a disincentive for the private sector to improve the efficiency of oil consumption and develop alternative energy sources.

The fact that oil prices do not reflect actual costs has complicated efforts to develop alternative energy due to limited fiscal resources. For example, government policies to subsidise LPG for household cooking gas have affected efforts to promote NGV as alternative fuel for transport.

"The government should target energy efficiency together with economic growth, as 70 percent of the country's energy consumption comes from imported fuels," Dr Yunyong said.