Thailand Economy Watch

Thai Economy Slows In Q2 2008

2008-08-25T17:07:00.002+02:00

Thai economic growth slowed to a seasonally adjusted 0.7 percent quarter on quarter in the second quarter. Year on year GDP grew by 5.3 percent, below the revised 6.1 percent in the first quarter.

The state planning agency raised its full-year growth forecast to 5.2-5.7 percent from 4.5-5.5 percent predicted in May due to healthy exports in the first half and an expected boost from government stimulus measures in the second half.

The underlying reasons for the slowdown have been the inflation situation together with the continuing political uncertainty, both factors which weigh on consumers and investment.

The National Economic and Social Development Board (NESDB) now expects inflation to hit a 10-year high of 6.5-7.0 percent in 2008, up from 5.3-5.8 percent forecast in May, but below a 7.5-8.8 percent projection by the Bank of Thailand in July.

Despite the slowdown it seems unlikely the Bank of Thailand will refrain from raising interest rates when it next meets on Aug. 27.

Thai Consumer Confidence Rebounds In July

2008-08-14T13:55:00.002+02:00

Thailand's consumer confidence rose in July for the first time in four months as easing oil prices and government measures to help the poor cope with inflation boosted sentiment. The index climbed to 71.8 from 70.8 in June, the University of the Thai Chamber of Commerce said in Bangkok today.

The government said inflation peaked for the year in July, when oil prices started to fall from record highs. Policy makers have announced economic-stimulus packages and pledged to try to expand the economy by 6 percent this year follwing a 4.8 percent rise in 2007.

The government on July 15 announced a plan to cut excise taxes for fuel, offer free electricity and water to low-use households, and waive fares for cheap bus and train seats in a six-month program that will cost 46 billion baht ($1.4 billion). The measures aim to reduce the burden of low-income earners and ease inflationary pressure.

Thailand Outlook August 2008

2008-08-07T22:23:00.002+02:00

by Claus Vistesen: Copenhagen

Executive Summary

Thailand's economy grew at 4.8 percent in 2007. Despite a number of factors affecting public sentiment - the political uncertainties, the imposition of capital controls in December 2006 (subsequently removed in March 2008), and the proposed amendments to the Foreign Business Act - net exports continued to provide the main support for growth while domestic demand has continued to remain weak. The Thai economy is expected to slow slightly in the second half of 2008, and then pick up speed again in 2009 as long as global energy prices continue to fall back somewhat from their June 2008 highs.

Headline inflation had been on a downward path after peaking in mid-2006, but started to pick up in Q4 2007 on the back of escalating energy prices, and reached an annual rate of 9.2 percent in July. Core inflation has been lower, but has followed a similar trajectory, reaching 3.7 percent in July and thus falling just outside the Bank of Thailand's 0-3½ percent target band. The Bank of Thailand has, belatedly, begun a process of monetary tightening, but we do not anticipate they will move into truly “hawkish” mode.

Following an appreciation of about 14 percent against the U.S. dollar in 2006, the baht appreciated by a more moderate 6.4 percent in 2007, in line with other regional currencies. The current account registered a surplus of over 6 percent of GDP, and reserves increased to US$87½ billion by end-2007 (equivalent to 6½ months of imports of goods and services). This appreciation has continued into 2008, and given the importance of exports to the Thai economy it is likely that restraining any further significant rise will be an important objective shaping policy formation both at the central bank and at the Ministry of Finance.

Country Outlook

As is to be expected, both the cyclical and the structural performance of Thailand’s economy tend to be somewhat adversly affected by the various comings and goings associated with the country’s ongoing internal political conflicts. Historically the political instability which these create has tended to manifested itself in the form of what are admitedly normally rather benign military coups. Although a strong argument could be made that these specifically Thai political theatricals have already been incorporated into market pricing and practice it is still a factor which investors need to bear in mind, as capital flows may, on occasion, be temporarily affected.

In our most recent long term analysis of the Thai economy (see Thailand’s Economy – At a Crossroads) we showed how GDP growth in 2006 was almost exclusively driven by net exports as household consumption and fixed capital formation came grinding to a halt. A key internal development to take into account here has been the military coup and ensuing economic uncertainty which lingered throughout 2006 and which naturally put a significant lid on domestic activity.

In 2007 the positive contribution from net exports remained the core component in GDP growth but there has also been a clear change in the underlying tempo. Domestic demand was on the upswing in the second half of last year with private consumption expenditure up by a moderate 1.8 percent y-o-y in each quarter, following a very lacklustre performance indeed in each of the previous two quarters. This tendency was sustained into Q1 2008, with private consumption up by a much more solid 2 pedrcent y-o-y.

Agricultural output has, as might be expected given the surge in global prices, grown considerably, and was up by 3.5 per cent year-on-year in the first quarter, accelerating slightly from 3.1 per cent in the previous quarter. Both livestock and crop production increased significantly, and particularly the production of rice and energy crops such as cassava, palm oil and soybean. High agricultural price evidently encouraged farmers to expand their production. Growth in manufacturing output remained healthy, and was up 9.7 percent year-on-year, as compared to an average growth rate of 5.7 per cent in 2007. This surge in manufacturing was driven by both export-oriented and domestic-oriented industries. Export-oriented industries which put in a strong showing included electronic products, computers and equipment, televisions and air conditioners, while domestic-oriented industries such as the production of alternative energy (E20) compatible cars and petroleum products also expanded well.

Private investment was up a healthy 6.5 percent year-on-year in Q1, largely accelerating on the back of increased machinery and equipment investment from the previous quarter’s growth rate of 3.9 percent. Previous baht appreciation helped cap import costs, while at the same time attracting the capital to replace and expand plant and equipment. Business confidence also improved in Q1, and the Business Sentiment Index rose from 45.0 in the previous quarter to 45.9. Investment in construction also began to recover, following a sharp contraction in Q4 2007.

Finally, and after a predictable slump in 2006 on the back of the political tensions and the aftermath of the Tsunami tourism, has continued to accelerate in 2008 and preliminary data for Q2 show an improving trend, partly due to a low base in the same period last year, and the number of tourists during the first 2 months of the quarter expanded on average by 16.6 per cent year-on-year.
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On the external front, net exports in Q1 contributed 0.6 per cent to GDP, down from the 2.5 per cent registered in the previous quarter. This was mainly due to a rise in imports following an expansion in domestic demand, and of course the increased cost of oil. Imports were up by 10.3 per cent year-on-year in Q1 accelerating across the board in every category from 6.2 per cent growth in the previous quarter. Meanwhile, exports of goods and services continued to expand well with a growth rate of 8.7 per cent year-on-year. Noticeably, income from foreign tourists rose sharply while exports of goods softened slightly compared to the previous quarter. This was due to a softer growth of exports in fisheries and electronic circuits, despite healthy export growth in agricultural products, jewelry, vehicles and parts, and electrical appliances.

For 2008, the central bank is forecasting GDP to be in the range of 4.8% to 5.8%, while Thailand's Finance Minister Surapong Suebwonglee is predicting 6%. Since 2007 saw growth at only 4.7% this latter view must be considered a decidedly bullish forecast, and it is more than likely that general global conditions will dictate a rather slower pace of growth in the second half of the year following a strongish showing in the first half.

As regards its external balance Thailand still seems to be laboring under a once bitten twice shy mantle. Thus, with the exception of a rough, but short, bout of capital flight in 2005 Thailand has maintained a small but clear surplus on its external books. Given Thailand’s economic development profile this may seem rather odd but the effects of the Asian currency crisis still clearly in the forefront of Thai policy makers thinking.

This surplus has been achieved through continuous attempts by the Thail authorities, not to halt capital outflows, but rather to slow down inflows and the ensuing appreciation of the Bhat. Consequently, in December 2006 the BOT put in place capital controls and demanded unremunerated reserve requirements (URR) on short term capital inflows in order to deter speculation over possible appreciation of the Bhat. Capital controls were finally lifted in November 2007 and the reserve requirements disappeared at the end of February 2008.
However, and even though Thailand has been rather cautiously dipping its toe into the water with respect to a full blown exposure to the global search for yield, the post 1998 currency crisis economy has still seen a steady flow of foreign investors moving into Thailand (see here Thailand’s Economy – At a Crossroads).

This leads us neatly to the break-up of the current external position. In light of a consistent positive financial account and thus inflow of portfolio investments Thailand’s income balance is, as might be expected, negative. This is perfectly in line with economic fundamentals as it merely means that foreigners hold more claims on Thailand than Thailand holds on foreigners.

In fact, as the GDP break down above shows, this persistent surplus on the external balance is what propelled Thai GDP growth throughout 2006 and to some extent into 2007, although domestic demand is now picking up, even though the rate of acceleration is slow.

Moving on to price developments, Thailand enjoyed something of a perfect storm in 2007 as headline inflation remained pretty subdued at 2.3% (y-o-y) with core inflation running at around 1%. This was well in line with the central bank’s, rather wide, core inflation target which lies in the 0-3.5% band.

However, a target this wide which is based on core prices does not seem an especially strong or adequate instrument in the current climate. Thus, while headline prices remained relatively low in the first three quarters of 2007, Q4-2007 and Q1-2008 have seen Thailand subjected to the full volley of the global energy and food price inflation shock.

Recent forecasts from the central bank are signalling significant upside risk to future inflation developments. The combination of rising headline inflation feeding into producer prices at one at the same time as domestic demand seems to be staging a recovery points towards further inflation in the pipeline. The quarterly PPI index rose at a significantly higher pace in Q4 2007 (7% y-o-y) and Q1 2008 (10.3% y-o-y) relative to previous quarters. Consequently, in their most recent inflation report the bank does seem to have taken on board the need to take headline inflation into account too . The main argument here is that the latter now seems to be breaking its hitherto strong trend-relationship with core prices.

In light of the increased pressure from headline prices, the central bank (chaired by Mrs.Tarisa Watanagase) opted, at the July meeting, to up interest rates by 25 basis points to 3.50%. This raise broke the 3.25% holding position the bank has maintained since Q3 2007. According to the central banks own 2008 core inflation forecasts (2.2% y-o-y) the 3.5% interest rate translates into a positive real rate of 1.3%. However, if corrected for the current headline inflation the real rate resides firmly in negative territory at -5.7%. In general, and according to the central bank’s own calculations, we can cleary affirm that Thailand’s real interest rate remains one of the lowest among any of its Asian peers.

One key variable to gauge in this context would then also be the Bhat. In light of global fundamentals one would expect a hawkish central bank to coincide with an appreciation of the currency. Given the fact that the BOT has held rates steady for the past 1 ½ year, we are still to see whether this applies in Thailand’s case. So far the appreciation against the USD has seen the Bhat rise in value to the tune of 23.5% (at its peak) since January 2006. The recent months however have seen the USD claw back some of this so that the USD/BHAT now resides in the 33-34 range.

In light of the gradual lifting of reserve requirements and capital controls the outlook on the Bhat has been decisively bullish, with sell side analysts forecasting an appreciation in the region of 15% against other major currencies. In many ways, the Bhat already has been riding an appreciation around these levels and it is unclear that it will move towards 20-25 against the USD anytime soon.

Outlook on Key indicators

GDP growth is expected to remain strong in Q2, and then slow slightly in the second half of the year. However, if we take current prices and deflate with the immediate level of inflation it is not at all unlikely that inflation may eat up a substantial amount (especially if we deflate with headline inflation) of any potential increase in living standards and purcasing power, and private consumption is likely to remain weak, and recent poor showings in consumer confidence would seem to point in this direction. Generally, the slowdown in global momentum should also be put a de-facto ceiling on the current expansion in Thailand’s economy. At the same time, should global oil prices fall back more in the second half of the year, it is our opinion that Thai growth may well accelerate again in 2009, and we are currently forecasting headline GDP growth in the 5.5 – 6 percent range for FY 2009.

In the statement following the recent 25 basis point hike the monetary policy committee (MPC) noted that it would stand ready to counter any effects from further increases in inflation. Given this investors should begin to incorporate the idea of an increasingly hawkish BOT into their thinking. However, it remains unclear whether in fact we are not at a tipping point as far as golbal inflation goes. Should this be confirmed, and should headline inflation finally begin to offer a breathing space, then the BOT may be reluctant to raise rates to any significant extent, especially if this would mean driving up the Bhat further at a time when export growth remains the principle strong point in the economy .

The future course of the Bhat is thus difficult to call at this point in time. Clearly, if the economy continues to expand from its low “post military coup” level, and if the BOT opts for a hawkish course then the scene is set for a significant further appreciation of the Bhat. However, the general outlook for Asian economies is also one of re-coupling to the rest of the world and given that Bhat already is at a fairly high level (e.g. against the USD) we will need to see the BOT’s reaction and investors’ response before making any decisive call on the trend.

Thai Inflation Accelerates in July 2008

2008-08-01T18:16:00.000+02:00

Thailand's inflation accelerated to the fastest pace in a decade in July, suggesting the central bank may increase borrowing costs further to tame prices even as economic growth cools. Consumer prices gained 9.2 percent from a year earlier, the Commerce Ministry said today in Bangkok. The rate was the highest since July 1998. This was up from 8.9 percent in June.

Surging oil and food costs may prompt Thailand's central bank to raise its benchmark interest rate for the second time in as many months when policy makers next meet on Aug. 27. Growth in Southeast Asia's second-largest economy is slowing amid legal challenges to the government that are sapping confidence.

Core inflation, which excludes fresh food and fuel prices, accelerated to 3.7 percent in July, the Commerce Ministry said today. The pace, which exceeded for a second month the 3.5 percent ceiling used by central bank policy makers to help set monetary policy, compares with the 4 percent expected by economists.

The Bank of Thailand on July 16 raised its one-day bond repurchase rate by a quarter percentage point to 3.50 percent, the first increase in two years, saying it may raise it further to cool inflation.

Thailand Q1 2008 GDP

2008-07-06T16:28:00.000+02:00

In the first quarter of 2008, Thai gross domestic product expanded 6.0% over the same period last year, which was above the 5.7% growth registered in the fourth quarter but in line with market expectations. The result continued the rising trend in place since the second quarter of last year and, in fact, constituted the fastest growth pace in two years.

The improvement over the previous quarter was entirely due to a strengthening domestic sector, as the contribution of the external sector to the economy decreased compared to the third quarter. Both private consumption and investment accelerated compared to the final quarter of last year. Private consumption expanded a subdued 2.6% year-on-year, which was, however, up from the even more paltry 1.8% annual growth observed in the previous quarter. Investment accelerated from 4.0% annual growth in the fourth quarter to 5.4%.

In the external sector, export growth quickened a notch (Q4: +8.5% year-on-year, Q1: +8.7% yoy), but imports accelerated more and added 10.3% (Q4: +6.2% yoy). At the sector level, the improvement compared to the previous quarter was due to accelerations in both agriculture and industry, whereas services slowed down. A quarter-on-quarter analysis corroborates the picture of a strong economy suggested by the annual data, as GDP expanded 1.44% over the previous quarter in seasonally adjusted terms. The government aims for the economy to grow 6.0% this year, and recently stated that it will step up public spending in order to meet this target.

Fertility, Employment and Inflation in Thailand and Vietnam

2008-04-27T23:33:00.000+02:00

"Thailand has even gone the extra mile to explore additional land for rice production," James Adams, World Bank Vice President for East Asia Pacific

The above quote is a reference (of course), to the current global shortage od rice for international trading purposes and to the sudden spike in rice prices (see a much fuller explanation of the whole issue in this companion post). James Adams is simply highlighting one possible step that can be taken, if not towards a complete solution, then at least along the road to an amelioration of what is likely to become - in some of the world's poorer regions - a very acute crisis indeed. But the issue of rice prices (and indeed of the whole structural rise in food and energy prices) is a complex one, and a lot of seperate factors come into play. Land use is simply one of these.

In Thailand’s Than-En village, Phantipa Chongrak, 38 sold her last four-tonne, unprocessed harvest in January for $235 per tonne, half what rice is selling for now in her area. But Ms Phantipa, who owns 1.9 hectares of land, has now bet big on higher rice prices – renting an additional 5.6 hectares to cultivate an unusual out-of-season rice crop, an investment of about Bt150,000 ($4,730, €3,020, £2,380).

Hoping to profit from the soaring price levels, plenty of other Thai farmers have done the same, with Thai agricultural officials predicting an extra 1.6m tonne harvest in June. But that has left Ms Phantipa anxious about her expensive gamble. “I’m thinking and worried that in the next two months the price will be down,” she says.

Obviously the decision procedure facing farmers like Phantipa Chongrak is a complex one. To some extent they need to bet that the rise in prices is going to be more or less permanent (which it may well be) but they will almost certainly be doing this on the basis of very "imperfect information" since they do not have their disposal the sophistocated models and information which international economists can resort to (and god knows, we have a significant enough tendency to get things wrong). So James Adams is right, many in Thailand are preparing to go that extra mile (and let's just hope for there sake that they don't need to "erect one bridge too many" to cover it).

Structural Issues in the Global Agricultural Labour Market

As I say the totality of issues which are being raised by the recent rise in food and energy costs constitute a very complex problem indeed, and in these posts I do not pretend to be able to address all of them. Indeed the question I am raising here is really a very simple one: there is no doubt that globally we have the land surface available to increase agricultural output substantially - even if we should be aware that presently unused land is unlikely to be of the same quality as the land which is being currently put to use (otherwise it is hard to see why it is not currently producing). We also have the technological resources to increase agricultural productivity in a way which enables us not only to feed the additional global population we are facing, but even to meet the needs presented by the rapid rise in living standards which is also taking place in the emerging economies.

We have both of these things (land, technology), but do we have the people we need to put them to work? Or better put - since obviously with those extra billions who are about to come on line across the planet we could hardly be said to be short of people - do we have the right people in the right places? That is to say, do we have the people where we want them, and with the levels of skill and education (you know, to use the technology effectively) that we need? Since if we don't we have what economists have traditionally called a "bottleneck problem", but this time we have it on an unprecedented (global) scale, a scale where the traditional economic remedies (labour market mobility and flexibility) tend to meet with a very high level of cultural resistance.

To take the most simple example, when we start talking about recovering currently unused agricultural land (that extra mile, remember), we might like to stop to think why it stopped being used in the first place. One obvious reason is that it wasn't sufficiently productive at the then prevailing prices, and this will often be true. But another reason would be that growing urbanisation and declining rural populations have simply meant that some land became fallow for demographic reasons (namely that there were not sufficient people willing to stay and work it, at least at the wages which were then being offered), which brings us straight back to my principal point - where and how are we going to find and persuade the people who could work the land to do so. Even the best designed plans - which always look ever so easy and attracive on paper - all too often come to founder on harsh and complex "on the ground" (no pun intended) realities. And if the solution here passes through raising rural wages and rural living standards, then remember that those of us who live in highly urbanised and developed societies may well notice this, in the form of higher prices, continuing inflation in food and energy, and indeed very possibly in a sustained period of what economists like to call "stagfaltion". That is, what we are talking about here isn't exactly small beer.

Migrant Dependence in Thailand

Turning now to a specific example, in the Thai case this whole "where does the labour come from" question is no idle one since fertility - including rural fertility - is now well below replacement level and still falling, and every year less and less young Thais are available to enter the labour market. So basically if the Thais want to work extra land they will need to find the human resources with which to do it.

One option, evidently, is immigration, and the tragic death by suffocation of 54 migrant workers from Myanmar who were being transported into Southern Thailand in an enclosed container truck earlier this month certainly drew the attention of the world's press to existence of this phenomenon in Thailand and to the level of dependence which the current expansion in the Thai economy now has on imported migrant labour. So it isn't only capital which is flowing strongly into Thailand at this point (the astute reader will recall that in fact the Thaksin government actually fell shortly after taking the decision to try to stop too much capital entering the country), labour is also streaming in to allow it to be effectively put to work.

The migrants who died were following a route that tens of thousands of others from Myanmar had taken before them. They are drawn to Thailand to work in jobs described by locals as "dirty and dangerous" - the fisheries industry, construction sector and on rubber and palm oil plantations.

In fact migrant Myanmar labour has long formed a significant part of the workforce who make possible the construction of all those hotels and holiday complexes that now dot the beaches of Phang-nga and Phuket, the mainstays of Thailand's vibrant tourist industry. In the fisheries sector, the men are employed on the boats that go out to sea, while the women work in factories to process the catch.

True, the numbers are not at this point large by Western European and US standards, but they are strategically deployed across the economy. In 2007, Thai labor officials and NGOs estimated that there were some 2 million migrant workers in Thailand, 75% of whom came from Myanmar, while the rest came from Cambodia and Laos. Only 500,000 of these however were registered with the Thai Labor Department.

According to a recent report "The Contribution of Migrant Workers to Thailand" (Main finings online here) prepared for the International Labour Organization by Philip Martin of the University of California (Davis) total migrants in Thailand rose from about 700,000 in 1995 to 850,000 in 2000 and to 1,773,349 in 2005. They constituted 2.2 per cent of the labour force in 1995, 2.5 per cent in 2000, and 5 per cent in 2005.

In 1995 some 42 per cent of the migrants were registered. In 2000 this was up to 67 per cent, but by 2006 it had fallen back again to 26 per cent, with these large fluctuations in the ratios undoubtedly reflecting ambivalence on the part of the Thai authorities to the whole situation. They need the workers, but they don't really want them. How resonant this is of so many situations in so many other countries. Perhaps those who imagine that land can simply be rolled online as we need it (right along a nice simple neo classical production function) might like to think a little more deeply about these kind of issues.

In terms of activities involved, the ILO found that in 2005 the migrants they were able to identify were distributed roughly as follows : 720,000 in agriculture, 720,000 in industry, and 360,000 in services.

Philip Martin calculated - making the assumption that the migrants were as productive as their fellow Thai workers in each of the sectors where they work - that the total migrant contribution to output would be in the order of $11 billion (or about 6.2 per cent of Thailand’s GDP). Assuming they were somewhat less productive (say only 75% of Thai worker output) then their contribution would still be in the order of $8 billion (or 5 per cent of GDP). So we could estimate that migrants in Thailand now contribute anywhere from 7 to 10 per cent of the value added in industry, and 4 to 5 per cent of the value added in agriculture.

Really the picture we are seeing in one country after another across the globe is strikingly similar from this point of view. As countries fall below replacement fertility they increasingly come to depend on migrant labour to work in areas like agriculture, construction, low skilled industry and domestic work. Yet in Thailand, as in many equivalent western countries the new and much needed workers are often far from popular.

Thailand returned to civilian rule in January 2008, with Samak Sundaravej of the People Power Party replacing deposed prime minister Thaksin Shinawatra. The PPP campaigned on a populist platform aimed at reducing rural poverty, and said it would use its first six months in office to revive the economy before tackling controversial issues, including migration.

The military government that ruled between September 2006 and January 2007 had taken a hard line against migrants from neighboring countries, supporting five southern governors who banned migrants from talking on cell phones, riding motorbikes, or leaving their Thai housing between 8pm and 6am. However, faced with the inevitable it did prove to be just as flexible as governments elswhere at the end of the day and finally approved a plan to allow migrants who failed to re-register in 2007 to pay a fine (3,800 baht, $120) and register for two-year work and identity cards during January-February 2008.

As I have said most migrants in Thailand are employed in low paid unskilled jobs in construction, manufacturing, agriculture, fisheries and domestic service in northwestern and southern provinces. Relatively few jobs held by migrants are attractive to Thais and few migrants work in the areas of highest unemployment in Thailand's northeast. The apparent magnitude of migrants' contribution to Thai GDP and their sectoral concentration suggests that they will continue to contribute substantially to the country's economic development for the foreseeable future.

The Vietnamese Case

But turning now from a country which is below replacement fertility and importing migrants, to one which is below replacement and exporting them, let's examine the case of another of the world's leading rice exporters - Vietnam - which is in fact the third exporter globally after Thailand and India. As can been seen in the chart below, Vietnam has enjoyed very rapid economic growth in recent years, especially when measured in US dollar terms, and this economic growth has both raised living standards and expectations, and reduced productive land available for rice cultivation.

As I have been trying to argue, the issue of rice prices (and indeed of the whole structural rise in food and energy prices) is a complex one, and a lot of seperate factors come into play. Land use is simply one of these: Vietnam’s total paddy acreage has dropped from 4.3m hectares to 4m hectares in recent years, and part of the reason for this has been increasing pressure on land use from other areas like industrial development and housing. Of course, raising output is not incompatible with using less land, providing productivity rises fast enough, but this (as we will see later) is not always as easy as it sounds on paper. A second factor which is also important is inflation - and again as we will see, Vietnam is now suffering from a fierce bout of inflation - since rapid rises in the prices of some basic commodities can lead to hoarding in the expectation of future price increases, and the only way to halt this is to convince people that prices will stabilise, something which in the present climate is very hard to do indeed. Basically a combination of rapidly rising living standards and an increase in inventories for "hoarding" purposes can provide us with a large part of the explanation for why it is that despite the fact that Vietnam has now ceased to export rice the queues to be found in Ho Chi Minh city are currently longer than anything which has been seen since the height of the communist era.

But things are not, as we have been seeing (in, for example, this accompanying post on the roots of the problem) as simple as we - or classical economic theory - might like them to be, since many things are interconnected here, and in fact far from being able to simply breeze that extra mile that James Adams is rooting so hard for, Vietnamese farmers are currently losing thousands of dollars every year as a result of manpower and machinery shortages when it comes to harvesting the rice they would evidently like to grow.

Provinces in the Mekong Delta region continue to face a lack of workers to harvest crops.

At least this is the situation described in a recent survey carried out by Can Tho University, and the problem has now started to become an acute one since - owing to Vietnam's spectacular recent growth (see above chart) - potential young farmerworkers are leaving in droves for urban centres, industrial parks, export processing zones or points farther afield (external migration), in search of jobs which offer better pay, and given the collapse in Vietnamese fertility which has taken place since the late 1980s, there are now, in a fashion which is eerily similar to the pattern we have already been noting in China, fewer and fewer young workers about to enter the Vietnamese rural labour market, creating a potentially huge long term labour gap in areas like the Cuu Long (Mekong) Delta (Viet Nam’s biggest breadbasket).

For Vietnamese farmers, the sharp rise in rice prices comes amid rapid change in the rural landscape. Vietnamese rice farmers today are far more productive, and prosperous, than they were during the ill-fated, and long abandoned, drive to collectivise agriculture. But in the new drive for nationalisation, much prime paddy land is being converted to factories and housing.

According to Hanoi’s Institute of Policy and Strategy for Agriculture and Rural Development, Vietnam’s total paddy acreage has dropped from 4.3m hectares to 4m hectares in recent years, which has raised concerns about the country’s long-term food security. “We are warning against diverting [rice] paddy land to other uses,” says Duong Ngoc Thi, a senior official at the institute.

Of course increased investment in improved technology would help - a combine harvester operated by three people has the manpower equivalent of 100 farmers - but apart from finding the money to make this work, the techno-fix is not that simple since Vietnamese paddy fields are wet and muddy compared with the waterless fields which serve for other crops, and this makes it much harder for foreign-made, modern machines to work well in them.

Nonetheless an increase in investment would undoubtedly help the Vietnamese rice industry avoid so much of its potential crop each year, according to Nguyen Van Chien, an official from the Vietnamese Ministry of Agriculture, and agricultural mechanisation could help enhance the quality as well as the quantity of Vietnamese rice, boosting the country’s competitiveness for rice exports with its chief rival, Thailand. At present, Vietnamese rice sells for around $20 less per tonne than Thai rice.

Of course, it is important to bear in mind that despite the dramatic drop in fertility Vietnam's population is still rising fast. This is the so-called "momentum problem", since the last cohorts from the high fertility era are very numerous, and thus when they reach childbearing age will tend to produce a large number of children, even if the number each individual woman has is a lot less than previously. In addition we need to add-in the impact of increased life expectancy as rising living standards improve the general health of the population. So Vietnam's population is both increasing, and ageing rapidly, and this latter issue will undoubtedly have significant consequences later on.

It isn't only in rural Vietnam, however, that labour shortages are now appearing. The Ho Chi Minh City Construction Association has forecast that this year the city will face a labour shortage in the construction industry since the number of building projects awaiting execution has doubled. In a recent report they noted that the shortage problem got significantly worse in the post-Tet holiday period, since (and in an example which follows a pattern we have already seen in China) many young workers did not return to their jobs after the holiday. Most construction companies have been busily raising wages in an attempt to entice more people yet the shortage persists. Nguyen Huu Quang, deputy director of the NBH Building Service Ltd. Co, is quoted as saying that construction companies in HCM City were in danger of losing a significant part of their human resources.

As I mentioned, this failure of people to return after the Tet holiday is surprisingly reminiscent of the situation as reported in China after the end of the recent winter holdiday. The Economist - in an article entitled Where is Everybody - reported that the vast annual migration of around 20m people that has been fuelling the manufacturing boom in southern China over the past two decades is now rapidly diminishing.

The Guangdong Labour Ministry is reporting that 11% of the workers did not return after the January holiday period, and independent estimates put the number as high as 30%. Whatever the exact details, many factories are reeling. Wages were already rising (according to government figures by around 20% y-o-y) now they will surely go up further. Meanwhile, revenues are falling due to slowing demand from America and a reduction, following pressure from other countries, in China's complex system of export subsidies.

According to HCM association’s figures, construction companies in HCM City currently can supply more than 42,000 skilled masons, a number which is far below the real demand for workers, which is thought to be somewhere in the region of 100,000. In a trend which has been evident in other countries (like Eastern Europe) skilled construction worers have either transferred to other provinces (or gone abroad) or returned to their hometowns where better infrastructure now exists and a rapid rise in the construction of industrial parks and export processing zones is producing plenty of work.

And what is the result of these growing labour shortages? As we have been seeing elsewhere (and again the East European comparison is instructive) the outcome is virtually inevitable: rapidly rising wages and accelerating inflation. Vietnamese consumer prices rose 21.4 percent in April, the fastest pace since at least 1992 and the IMF are now forecasting annual inflation of 16% for the whole of 2008 in Vietnam.

These growing labour shortages, which can to some extent be anticipated in any economy which is growing rapidly, are exacerbated in Vietnam by the fact that many potential workers - in a way which is similar to the situation which is to be found in Poland or Romania - now work abroad, whether as temporary or permanent migrant labour. There is, however, one important difference between Vietnam and Eastern Europe in this regard in that Vietnam has an active policy of encouraging what they call "labour Export", indeed the Ministry of Labour has a whole department which is dedicated to the topic. The reason that this policy is persued is not hard to imagine. It is summed up in one single word: remittances. For 2006 the World Bank estimates that migrant workers sent home to Vietnam roughly $4.8 billion, or 7.5% of GDP.

As I say, it is not simply a question that people from Viet Nam want to go to work abroad, the Vienamese government is actively encouraging the process. As a result the number of foreign destinations has been expanding significantly. There are now more than 40 countries to which Viet Nam "exports" labour, compared with 15 in 1995. The Vietnamese labour market generated about 1.68 million new jobs in 2007 according to the Ministry of Labour, Invalids and Social Affairs. About 1.6 million of these new jobs were generated inside Viet Nam, but about 85,000 were jobs abroad, and these brought the total number of Vietnamese guest workers and experts officially working abroad to over 400,000 in 2007. And the Labour Ministry is working on further expanding the business, since it has plans to raise the rate of "exported labour" at an annual additional rate of 40,000 to 50,000 (to around 130,000 annually) by the time we get to 2010, an increase of 65 five per cent over a five-year period.

Job seekers at a recent employment exhibition held in Ha Noi. Obviously given the wage differentials which exist people are eager to leave, but should the Viet Nam government be actively promoting the process? In the short term it eases pressure on the labour market, but at what price in the longer term?

One destination which is proving increasingly popular is South Korea, and the Vietnamese Ministry of Labour recently proudly announced that Korean companies would like to recruit 15,000 Vietnamese guest workers in 2008, 27 per cent more than last year. In addition the Korean Government has decided to allow 1,000 migrant Vietnamese labourers who had originally registered for agriculture work to transfer to construction, which is itself suffering from a shortage of workers, according Vu Minh Xuyen, vice director of the External Labor Center of the Vietnamese Ministry of Labour.

Xuyen said the workers will have to take an exam testing their understanding of the Korean language. The exam can be taken in May or October. Those living in remote areas and poor rural areas will be given priority.

Workers seeking South Korea employment learn Korean at a job service centre in the Central Highlands in Gia Lai Province. Korean company demand for Vietnamese guest workers this year is 27 per cent up against last year.

Of course South Korea is facing its own low fertility driven labour market issues. According to U.N. statistics, the fertility rate per women has fallen from 5.4 in 1995 to 1.5 in 2005 with the estimate for 2050 being 2.1. The population in the age group of 15-59 it is estimated to fall from 68.2 percent in 2000 to 50.4 percent in 2050, whereas the share of 60 plus population is to rise from 11 percent in 2000 to 33.4 percent in the same time span.

Recent statistics show that South Korea's birth rate fell to its lowest (in 2005). The projected (Health-Welfare Ministry forecast) fall in population from the present level of 48 million to 40 million will occur over next 45 years. The ageing index (U.N. statistics) is projected to grow from 52.7 in 2000 to 150.7 in 2025.

In a recent Korea National Statistical Office report, this index is forecast to reach 100.7 in 2016, almost doubling from 55.1 in July 2007, further projected to as high as 213.8 by 2030. This will put a tremendous financial burden on the working-age population (those aged 15 to 64), to support those elderly citizens, while the ratio of the working-age population to senior citizens is predicted to drop to as low as 2.7 per one elderly by 2030, as compared to the present level of 7.3 to 1.

So naturally Korea is going to increasingly need to import labour, and my only question is: does it make sense to import this labour from a country like Vietnam which itself is also going to be having problems over a fairly limited time horizon?

The point is economic growth of the kind Vietnam would like to have is very employment intensive. At the end of 2007, there were more than 45.6 million Vietnamese employed nationwide, an increase of 2.31 per cent over 2006, and the Ministry of Labour plans to generate a further eight million new jobs by 2010. This objective was recently announced by Dam Huu Dac, deputy minister in the department, who said it was part of a National Target Programme on Job Generation. "Each year, 1.5 to 1.6 million new jobs are being generated and a total of 49.5 million workers are expected to be employed by 2010." he said. And this is just it, right now Vietnam has a massive problem of job creation quite simply because the number of people of working age has been expanding rapidly, but soon, following that sudden turn downwards in the 15 to 19 age group curve, the problem will be inverted, and having constructed an economiy which needs and extra 1.6 million workers a year to keep moving the issue will be one of just where those workers are going to come from?

About 1.6 million seek to enter the Vietnamese labour market every year. Meanwhile, the nation’s population is growing by more than a million annually.

The question I am asking is really one about our whole perception of the ongoing demographic transition. Does it really make sense for a country with such low fertility as Viet Nam now has, and where labour shortages in rural areas and key sectors like construction are already being observed, to be so enthusiastically exporting - in a way which is very reminiscent of Eastern Europe - its future labour force? As I say, the issue here is as much one of changing how we see the situation as anything else, and getting it across to those responsible for making economic policy that "cutting your nose of to spite your face" may work in the short term, but in the longer term we are only building up problems, and big ones.

The Czech Connection

The story I am telling here is one of a web with many loose threads. And I wouldn't want to give the impression that I am arguing against labour mobility, far from it. I think that immigration from high fertility countries to lower fertility ones makes a lot of sense. What I am questioning is the movement of population from low fertility societies to higher fertility ones (from Poland and Latvia for example to the UK and Ireland, or from Ukraine to virtually anywere), and I am also questioning the advisability of countries which are attempting to grow rapidly while having falling and below replacement fertility actively encouraging and stimulating out-migration. At best this is simply moving the deckchairs round, and at worst it is robbing Peter to pay Paul when Peter is already out of money.

The strangeness and lack of apparent rationality in all of this is perhaps nowhere better illustrated by the close and growing connection between the Czech and the Vietnamese labour markets. The Czech Republic's economy is growing rapidly - around 6% to 7% per annum -and unemployment is amongst the lowest in the European Union. As a result the Czech Republic is now itself growing very short of labour (only 3 years after watching a stream of its own young people leave for work in the UK and elsewhere), since after 20 years of very low fertility (1.2-1.3 TFR range) there are now fewer and fewer young people coming forward into the labour market, and so, of course, the Czech Republic is busy out and about looking for migrants to fill the gap.

Initially they turned to their immediate neighbours, and indeed the largest group of foreign migrants with rights to work in the Czech Republic comes from Slovakia. At the end of last year, there were 101,233 Slovakians legally working in the country. Ukranians are the second most numerous group with 61,592 working in the Czech Republic as of last year. But there are problems here since both of these countries (and indeed all the other ones in the region) have very low fertility too, so they soon notice any drain on their labour resources, and this is then simply displaces a problem from one place to another and is not a long term solution.

As a result the Czech government is now looking further afield - much further in fact - since the number of Mongolian and Vietnamese workers working in the Czech Republic has been increasing rapidly. In 2007 there were 6,897 Mongolians working legally in the CR (up from 2814 in 2006) and 5,4425 Vietnamese (up from 692 in 2006). The numbers of Vietnamese present in the country is undoubtedly much larger, and according to the Czech police, there are almost 51,000 Vietnamese holding long-term or permanent residence permits for the CR, many of these associated with temporary student visas. Demand from people inside Vietnam is also way up, and the Czech embassy in Hanoi had to close its doors to visa applicants temporarily in March to reorganise itself in order to cope with the influx.

So you plug one gap to create another, and where I ask, is the method in all our madness here?

In this post I have not presented solutions, rather I have attempted to identify problems, problems which need to be addressed. But in order to adequately start to address the problem we need first to recognise that it exits. Basically I feel that far too many people - and especially at the institutional level - are still effectively in denial that the problem exists, and is important. What I would like to ask is when is someone (someone with some clout I mean) finally going to start taking seriously the idea that emerging economy countries like Vietnam need to try and do something about their fertility situation (and that something will undoubtedly involve dedicating resources to the issue) before they get stuck - like South Korea, Singapore, Taiwan and Hong Kong before them - down on that very bottom rung?

Thailand Growth Q4 2007

2008-02-25T09:34:00.000+01:00

Thailand's economy grew at the fastest pace in seven quarters towards the end of last year as exports of rice, automobiles and computer chips all steadily rose. Southeast Asia's second-biggest economy expanded 5.7 percent in the fourth quarter, accelerating from a revised 4.8 percent in the third quarter, the government said today in Bangkok.

Exports grew by 24 percent, almost double the pace of the third quarter, even as the baht's rise to a decade-high made them more expensive. Exports, which account for about 60 percent of the economy, accelerated from a 12.6 percent year on year rate of increase in the third quarter, according to central bank data. Exports reached a record $14.6 billion in November as demand from China and eastern Europe offset waning orders from the U.S. and Japan.

Quarter on quarter gross domestic product expanded by 1.8 percent in the fourth quarter, up from a 1.5 percent, seasonally adjusted, rate in the previous quarter.

The baht held at 32.29 per dollar as of 10:50 a.m. in Bangkok, its highest level since August 1997. The SET Index rose as much as 1.3 percent to 837.59, extending its gain over the past year to 22 percent.

It is not clear at this point how resilient Thai exports will be to any further slowdown in the US. Goldman Sachs recently cut their 2008 forecast for Thailand's expansion to 4 percent from an earlier estimate of 4.5 percent citing the possibility of a U.S. recession, while the Bank of Thailand continue to hold to 6 a percent growth forecast.

The U.S. bought 12.6 percent of Thailand's exports in 2007, followed by Japan's 11.9 percent and China's 9.7 percent.

Consumer spending rose 1.6 percent from a year earlier in the fourth quarter, slowing from 1.8 percent in the previous three months, today's report showed.

Total investment in the fourth quarter rose 4 percent, accelerating from a 2.6 percent gain in the previous quarter, today's report showed.

Manufacturing gained 8.1 percent following a 5.7 percent expansion in the previous three months. Private construction contracted 8.5 percent from growth of 0.7 percent a year earlier.

Government spending increased 16 percent, compared with the third quarter's 9.5 percent pace.

The Bank of Thailand lowered its benchmark interest rate five times last year in the longest string of rate cuts since May 2000. It reviews borrowing costs again this week. Most analysts expect the Bank of Thailand to keep its benchmark interest rate unchanged at the meeting on Feb. 27 due to accelerating inflation. Consumer prices rose 4.3 percent from a year earlier in January, the fastest inflation in 18 months, as fuel and food costs increased. There is, however, pressure on the political front, and the government has signaled it may pressure the central bank to lower interest rates. Prime Minister Samak said on Feb. 18 the government will use monetary policy to support economic growth.

Merry Xmas and A Happy New Year

2007-12-25T03:18:00.000+01:00

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.

Credit crunch, did someone use the expression credit crunch?

A return to democracy? Thailand holds its first post-2006 coup election

2007-12-24T23:25:00.000+01:00

Guest post by Manuel Alvarez-Rivera, Puerto Rico, Election Resources on the Internet

Voters in the Kingdom of Thailand went to the polls on Sunday, December 23, 2007 in the first parliamentary election held since the September 2006 military coup that overthrew the elected but increasingly authoritarian and allegedly corrupt government of Prime Minister Thaksin Shinawatra.

Thailand's legislature, the National Assembly is composed of the Senate and the House of Representatives; the latter has 480 members, of which 400 are elected in 157 two- or three-seat constituencies, while the remaining eighty seats are filled in eight electoral regions by party-list proportional representation.

Since a 1932 revolution brought an end to eight hundred years of absolute monarchy, Thailand has suffered numerous coups, and the country has alternated between intervals of at least nominal democratic governance and periods of military rule.
The democratic interludes were often characterized by fractious multi-party politics, weak coalition governments, and the participation of high-profile military figures in prominent leadership roles. However, in the 2001 general election the new Thai Rak Thai (TRT; Thais Love Thais) party of Thaksin Shinawatra, a billionaire telecommunications tycoon, emerged as the dominant political force, displacing the traditional parties on a populist platform of development money for rural villages, debt moratoriums for farmers and low-cost health care. Despite accusations of nepotism and cronyism, Thaksin remained highly popular among the rural poor, particularly in the northern and northeastern parts of the country. As a result, TRT won a large parliamentary majority in the 2005 general election, and Thaksin was able to form the first single-party government in the history of Thailand.

However, Thaksin's triumph proved to be short-lived. His government became even more intolerant of opposition criticism, and a snap legislative election called the following year in the wake of mass protests demanding Thaksin's resignation was boycotted by the opposition parties. The vote was subsequently invalidated by Thailand's Constitutional Court, and a fresh election was slated for October 2006, but the military staged a coup prior to the election and overthrew Thaksin, who was at the time in New York City. Corruption was cited as the reason for the coup, although widespread discontent about Thaksin's heavy-handed suppression of an armed insurgency in Thailand's predominantly Muslim south (the rest of the country is overwhelmingly Buddhist) appears to have been a major contributing factor as well.

The election is being held under a new constitution approved by voters last August - the country's sixteenth since 1932; however, martial law remains in force in 31 of Thailand's 76 provinces. TRT was dissolved after the 2006 coup and party leader Thaksin has remained in exile (for good measure, he was banned from taking part in politics for five years, along with more than a hundred prominent party figures), but a pro-Thaksin party - the People's Power Party (PPP) - has emerged as a major contender in the election. In fact, PPP leader Samak Sundaravej - an old hand in Thai politics - has made no attempt to conceal that 1) he's Thaksin's surrogate; and 2) that he wants to bring Thaksin back. In fact, Thaksin - who faces corruption charges in Thailand - has indicated he will return early next year. Meanwhile, the Democratic Party (PP), the main opposition party during Thaksin's tenure in power, is likely to emerge as the PPP's main challenger under the leadership of Western-educated, 43 year-old Abhisit Vejjajiva.

However, neither party may secure an absolute parliamentary majority, and several smaller parties may hold the balance of power, chiefly among them Chart Thai, led by former Prime Minister Banharn Silpa-Archa (another old-school politician). It's no secret that the military does not wish to see PPP in power, although they have insisted that the outcome of the election will be respected regardless of who wins. Nonetheless, it is anticipated that if no party secures an overall majority, the armed forces will exert pressure over the smaller parties to reach a coalition agreement with the Democrats.

What's less clear is what would happen if PPP wins an absolute majority. There have been rumblings about alleged PPP vote buying - in truth, an endemic problem in Thai electoral politics - and it's quite possible that the vote could be at the very least partially annulled (or PPP forcibly disbanded) on the grounds of electoral irregularities. A further military intervention cannot be ruled out, but if it takes place it may well generate far less public sympathy than the 2006 coup, particularly since the interim government put in place by the armed forces after the coup has proved to be inept, and Thailand's economic growth is now the slowest in the region. Nonetheless, the return road to democracy may turn out to be a rocky one.

Thailand's Economy - At a Crossroads?

2007-12-24T23:24:00.000+01:00

Guest post by Claus Vistesen: Copenhagen

As we never tire of pointing out here at this space the analysis and proper understanding of the global economy and more specifically her markets demand a vigorous interaction and -play between the overall broad conceptual analysis and the more nitty-gritty country analysis. Today, and as most people, in the Western World at least, rev up for some of that most scarce and precious quality time with friends and family I feel inclined to wander off over to Thailand for one last spout of economic analysis before closing down for the holidays. Before I start I think it would be only fair to point out that I am not exactly an expert when it comes to Thailand's economy but rather I shall progress in the spirit of traditional writings here at GEM where authors attempt to aspire to the ideal and tradition of the polymath rather than towards the profile of the 'genius savant' in one specialist area.

Yet, and despite my denial of expertise in the area of Thai economics I think it is safe to say that Thailand commands a rather special place in the whole global economic framework for two main reasons. The first is strictly endogeous to political life in Thailand, where the frequency with which governments are toppled by the military only to be subsequently re-inserted (with a quick change of label), is rather high when compared with most other members of the emerging economies leading group.

The lastest example of this tendency was handed to us a little over a year ago when General Sonthi Boonyaratglin ousted prime minister Thaksin Shinawatra and declared that a military junta would stay in power for a year. Such abrupt changes of government (and of course the way of changing them) have a tendency not to go down too well with foreign investors and naturally have tended to affect the ability of Thailand to attract foreign capital inflows, as well as to act as a source of outflows. Of course, many would, at this point in time, simply exclaim that since these things are now a natural part of the political cycle in Thailand they are already well priced-in to current market premiums. I will leave this issue here and simply note that whatever importance we ascribe to the political situation in Thailand, an interventionist military is certainly part of the picture and needs to be taken into account.

The second reason for Thailand's rather special position in the international economic environment is to be found by going back to 1997 and the Asian currency and financial crisis. As I am sure many of our readers remember Thailand acted was one of the principle centres of attention during the boom phase and then one of the victims of the sudden and abrupt retrenchment of private inflows to emerging markets which occured during the Spring and Summer of 1997. This would then translate into a modern day 'once bitten twice shy' mantle and although I am unsure whether this actually applies for Thailand it serves us well always to remember that debating capital flows in the context of Thailand always will tend to have that historical glow around it.

Where now for Thailand?

In order to deliver a reasonable crack at answering this after all very general question I need to invoke the headline of this note. In my opinion and as I will try to argue below Thailand is now at a crossroads. On the one hand Thailand finds itself right smack in the middle of the sweet spot relative to the ongoing demographic transition known as the demographic dividend. As we know this does not by any means constitute free lunches - of which, of course, there are very few, if any - but rather a golden opportunity for Thailand to move now in order to make sure that it does not go down the road of other rapidly ageing emerging economies of which China is perhaps the most important and best known example. However, if Thailand is to get rich before she actually gets old the window is closing fast.

By inspecting the graphs over at the Thailand Economy Watch we can readily see that Thailand with respect to its demographic position is now borderline between two extremes. The fertility rate has been stable at about 1.6 for the past 8 years and coupled with a rapid increase in life expectancy (which of course is a good thing) Thailand is now set to age rather rapidly. However, the effects of the ageing process are likely to be subdued in the interim as Thailand will enjoy something like 15 years of demographic headwind before reaching that ever so important 40 year median age threshold. Now, and although I realize that I have not yet fielded one single economic chart let me be very clear. A great deal of Thailand's economic future rests upon whether the economic growth which is now set to come and continue all things equal will bring Thailand a further notch into the demographic transition bringing TFR below the 1.5 mark. I really hope not and if there ever was an important objective for policy makers in Thailand it would be to make sure that what comes next is accompanied by an effort to keep the fertility rate from falling further, and preferrably, to find ways to nudge it back up to a slightly higher level. This would then bring me back to the present, which is what indeed is set to happen next in the context of the global and thus the Thailand economy?

Let us begin with a kind of overview of the Thailand economy such as it. As we can see from the two graphs fielded below, Thailand's prosperity has done been on the rise over the past 15-20 years, - a much more modest rise following 1998, but a rise nonetheless - and there is really no reason to believe that this will not continue to be the case in the immediate future. The Asian Crisis as it occured in the 1997-1998 is certainly not absent from the charts and you could even, if you are into such matters, debate whether in fact Thailand suffered an irreversible blow to its growth trend back in 1997? For more on this topic go here.

As for the short term economic data on Thailand, the most recent central bank inflation report (PDF) provides us with ample ammunition to get a more solid grip on the immediate outlook. If we scrutinize the data a bit more closely we see that growth in Thailand seems to have moderated somewhat when it comes to the evolution of headline GDP. This slowdown which must be considered in relative terms has coincided with a subtle but important change with respect to the engine of headline GDP growth. As can readily be seen from the chart the central bank provide (reproduced below) as private consumption and fixed capital formation have waned net exports of goods and services have slowly but surely been taking over as the main engine of economic growth in Thailand.

This is of course an important trend to take into account since it does mean that Thailand is subject to the whims of global markets to a higher degree than had been the case if private consumption had been doing the heavy lifting. Clearly, at this point we should remember that the time-span in question (i.e. Q2 2006 to Q3 2007) is exactly the period where domestic political uncertainty took a hefty leap upwards. So, it is really difficult to discern a notable trend in all this. However if we look at the central bank's private consumption index we can see after a slowdown at the end of 2006 (which would be associated with the political uncertainty) things do now seem to be turning back up again, so we may well be in a recovery phase.

Another notable feature of the recent trends in the Thai economy is the rather subdued rate of inflation which has come down over the course of 2006 and now into 2007/2008 as well. This seems somewhat odd when you look at the figures on the labour market where it quickly becomes clear that Thailand is firing on all cylinders at the moment with a monthly registred unemployment rate below 2% and somthing like 35 million people in work out of 64 million inhabitants. Indeed between the summer of 2005 the summer of 2007, Thailand added the best part of a million new jobs. This is really what the demographic dividend is all about, enabling rapid employment growth without provoking inflation. The demographic dividend isn't a policy, but it does produce an environment which is more favourable to the application of good policy.

This could indicate then that if consumer spending and confidence continue to enjoy a rebound, and if the political situation has reached some sort of resolution then the inflation gauge might start to tick upwards as we venture into 2008, especially in the light of the general global tendencies in base commodity and food prices. Finally, we have as I have already hinted above the trade surplus which since Q3 2005 has averaged around 15% of GDP offers Thailand a firm buffer for solid headline growth.

This then serves us to move further into the argument in this note and as such to the more specific point on capital flows which are central for the understanding of the current changes in the global economy and thus also Thailand.

Capital Flows and Thailand - To Receive or to Send?

Starting out with capital flows in the global economy I recently narrated the current economic climate as fairing in uncharted waters given the delicate situation in which we are now finding ourselves. This uncharted waters theme should not however be misinterpreted as lack of oversight which I feel we at GEM have plenty of. Rather, we are simply noting that what happens next will be an important test for many of our theses and arguments. In this way and homing in on what is especially important in the context of Thailand we have the mounting signs and evidence that the structures and chains of Bretton Woods II are slowly but surely being worn thin. These changes however do not seem supportive of those who have spent their time arguing for a process of de-coupling in the traditional sense whereby the US hands over the baton to a train being run by a joint tag-team consisting of Europe and Japan.

Moreso, what we are seeing is a historic process of re-coupling by which the engine locomotive of the global economy is changing from being driven exclusively by the US towards a more diverse crowd of leaders. How far this process will go on is yet to be seen. I for one don't envision for example that the US will revert entirely to growth path where a substantial external deficit is not part of the overall picture. But the main point is that the relative weight will change and perhaps more importantly that the changes we are now seeing are happening at a pace which is quite unprecented. Of course, as Brad Setser is set on hammering home a lot lately, the recent retreat of financing from the external US balance is largely due to an almost effective stoppage of private inflows which of course has the nasty side effect that the US is now ever more so dependant on official foreign government inflows in order to keep the boat floating. As for the general situation, the following wonderful quote from Setser quite eloquently sums up how we are now situated in somewhat of an interim position

Private investors want to finance deficits in countries that don’t want to run deficits. The countries now accumulating reserves the fastest have the least need for reserves. The country with the largest deficit is struggling to attract enough private inflows to match the increased desire of its private sector to buy foreign assets – let alone both the deficit and those outflows. And the country with the strongest traditional aversion to state-ownership is now the country most-reliant on government inflows.

As I mentioned above Brad Setser seems to be focusing quite a lot on the apparent disconnect between private and government/official flows with respect to the financing of the US CA deficit. This rather specific topic should be the center of another note and here we should rather move on to the obvious question. Given that changes are taking place of almost tectonic proportions in the structure of global capital flows what will this mean for Thailand? To deliver a reasonable attempt to answer that question I will need to field some grahps of which some, I am afraid, will be plotting some rather technical stuff. But I will explain as I go along. Let us first inspect the basic graphs plotting the CA balance and financial account as it has evolved on a quarterly basis since 1995. Note that these two are inversely correlated as the former measures the headline balance between flows of funds, goods, and services whereas the latter plots the net change in foreign ownership of domestic financial assets. This basically means that if the financial account is in surplus foreigners are buying domestic financial assets more quickly than domestic agents are buying foreign assets and vice versa of course if we are talking about 'selling.'

Once again, we can easily see when the Asian Crisis occured in the beginning of 1997. Other things to note is the fact that volatility seems to have returned to the overall CA balance in the recent years which is something I will talk a bit further about below. Secondly, and following from this point we see that foreign investors seems to have once more become rather fond of putting their funds in Thailand over the last couple of years as compared with the relative stagnation in the years following the currency crisis. This is can be further substantiated by a chart showing the flows of net portfolio investments.

As can be seen particularly well on this graph volatility has indeed returned with a venegance since 2004 and as I hinted this is bound to bring forth that 'once bitten twice shy' mantle. However, and as a testament to the new situation in the global economy the Thailand response to all this was essentially turned upside down when it came the 18th of December 2006. As Edward wrote just as the news was coming in off the wire, the measures to control capital were not designed to stem a potential rapid fall in the value of the Bhat as was the case in 1997. Quite the contrary;

So now we have capital controls, not to stem an outflow of foreign exchange, but to stop an outflow of domestic currency. Oh how the world has changed. Of course, it should escape no-one's notice that with fertility now well below replacement (somewhere in the 1.6 tfr range) Thailand is now right in the middle of that Demographic Dividend/Demographic Transition process I keep talking about.

Indeed, the world seems to have changed and Thailand now must decide how to position itself in this new situation. And this my dear reader brings me back to where I started and how Thailand now seems to be set a crossroads and while it may not be a question of losing your horse or your head, it does seem as if whatever road Thailand chooses it is a choice of some importance. In this way, Thailand seems to be faced with, at least, two interconnected choices moving forward from here. The first issue as I have hinted above is whether Thailand will be able to get the demographic house in order or not. There are of course many unknowns here either way but one thing seems fairly certain at this point. With life expectancy shooting upwards and fertility lingering at a TFR of 1.6 the next 12-15 years of economic development will be very important. If evidence from other countries is something to go by Thailand faces the imminent risk of tumbling down into the sub 1.5 TFR region which essentially constitutes something of a fertility trap. I strongly advise policy makers and others to strive so that this does not come to pass.

The second challenge which stands before Thailand relates to the whole changing structure of the international economic system and essentially the point that what we considered yesterday to be a distinction between developing and developed countries today is nothing but another anachronism ready for the big historical bin. In short, which strategy should Thailand deploy in an environment where liquidity is aflush and where the global search for yield is on? There is no straightforward question to this answer and in particular when we are talking about Thailand you cannot but expect that the old 'once bitten twice shy' dictum to be high on agenda. However, as I have also tried to argue above the times have changed immensely from 1997 and now Thailand is busy keeping money from pouring instead of pouring out. Consequently, it was only back in the beginning of December that we learned how authorities in Thailand were considering lifting capital control following today's elections (23rd of December). This then trickled down onto the jungle drums where echoes of double digit % Bhat appreciation were flying all over the place. Indeed, the Bhat has been on an upwards path as of late against the USD and now as the new government readies itself to take office we shall see what happens.

However, what would my view be on this then? Well, I certainly don't want to come off as being complacent towards allowing money to come in too quickly since when this happens there is always the risk that those very same funds may leave just as swiftly again. Nobody would know this better than those interested in Thailand's economy. However, perhaps we should also take heart of the fact, and as Edward so eloquently emphasised in the context of India recently, that the sands and seeds of time cannot be made to run backwards. At the end of the day you could then ask the most prominent question of whether in fact Thailand has a choice or not? Of course it does, Thailand like India, Brazil, and Turkey cannot just with a simple stroke of a magic wand absorb the procedes of a full scale of re-balancing/re-coupling of the global train. However, trying to stem the tide by building barriers is not likely to do any good either.

Conclusively, I want to finish off by adding that I see a whole lot of potential for Thailand's economy going forward. It is going to be a bumpy ride for sure and wills and wit will be tested but so it is with history and the future. Both of them are very much with us in the present. The last thing I would like to emphasise is the danger that Thailand follows the path of China not, of course, with the one-child policy per se but rather with respect to the path of growth where I clearly see an important link between the two; demographics and growth path that is. Export dependancy it seems, and not as per usual like all good things, will come to those who wait. Let that be a subtle reminder for Thailand as the country equips itself for a new year with new challenges.

Thailand's Demographic Window of Opportunity

2007-12-24T23:18:00.002+01:00

This post is really a supplement to Claus's post Thailand at the Crossroads, and a complement to Manuel's election coverage. Now Claus points out that Thailand is in the middle of its ongoing Demographic Transition, and at the high point of that favourable moment when what has become known to economists as the Demographic Dividend process is at its height.

The demographic transition is - in simple language - a movement upwards in population median ages. Societies (one after another) move steadily from being high fertility, low life expectancy, low median age ones (think Niger, or Mali, or Uganda right now), to low fertility, high life expectancy, high median age ones (think Germany, Japan and Italy) in a more or less steady and ongoing fashion. We know of course what the starting point of this transition is (the above mentioned high fertility societies have a median age in the 17/18 range) but we don't know where the end point is, since while Germany, Japan and Italy currently have a median age of 43 things clearly are not set to stop at this point, and we won't really know what the ceiling is in this process till we reach it. So on this count we have to watch and wait. But observing the evolution of these three "elderly" societies we can identify some of the processes which are at work as population median ages rise, so while we are waiting for the final readout there is still plenty of work to be done - in terms of policy measures to be adopted - in the meantime. Thailand is one of those fortunate countries who, having arrived on the developing economy scene rather later than others, can learn somewhat from those who have gone before. If she is ready willing and able to listen that is.

Median Ages

Now Claus and I do put quite a lot of store by the median age reading of a society, and we do this for all sorts of reasons. Basically median ages serve as a very convenient proxy for all kinds of economically important phenomena like saving and borrowing, fixed capital formation, construction activity and export dependence, productivity, and ultimately labour and consumer supply.

The movement up through the various median age levels involves a constant change in population structure, and at one point these changes are very favourable to economic development. These positive changes provide the background to what is known as the demographic dividend process. At the end of the day the transition from being a very low median age to being a very high one involves a shift in the dependent population, from having a very high proportion of young dependent population to having a very high proportion of elderly dependent. In the middle lie the most favourable years, which come in two stages. In the first stage there is simply an increase in the volume of people available for the transition to work in an expanding market economy. This could be thought of as the accumulation of inputs phase - during which time, as we can see in the chart below, the rate of population inctrease continues to be large - and at this point a societies ability to incorporate ever more people into relatively low-value economic activities at a rapid rate produces a growth spurt - like the one we are seeing now in many of the emerging economies. This is why, for example, Thailand can easily contemplate annual growth rates of 7 or 8 percent at this point without setting off the inflation alarms, something which, unfortunately, is not possible in Eastern Europe.

But the dividend doesn't end just when the steady downward movement in fertility starts to make itself felt by reducing the inflow of young workers at the labour market entry point, since there is a second dividend phase were the accumulation of quantity is followed by the accumulation of quality, and this is made possible by the steadily growing share of workers in the 25 to 50 age group, and by the rising human capital quality of the new young labour market entrants. This is when you could expect a productivity driven "TFP revolution" and a steady shift through the value sectors towards the more productive and higher value ones.

Of course there is nothing automatic about any of this, demography just provides an environment, then it is down to policy to benefit from or fritter the potential which exists.

Thailand at this precise point in time is, as Claus indicates, at the crossroads. Labour supply means it is possible to obtain quite strong GDP growth simply by increasing employment, without necessarily achieving large scale productivity gains. But Thailand now needs to move on to the second stage, and rapidly so, since the low fertility environment means that this flow of labour is steadily going to dry up (of course migration from Malaysia and Myanmar can help offset this to some extent) and that growth will now need to become more productivity "intensive" if living standards are to continue to rise.

Why is this such an important moment. Well let's look at Thailand's median age.

As we can see, Thailand's median age has been rising quite rapidly since 1990. It is now in the early 30s - which is definitely a very favourable point - but by 2020 (according to the UN median forecast) it can have risen to 37. And this estimate is very likely rather conservative, since it anticipates a rebound in fertility from the current, below replacement level, of 1.6 TFR.

This forecast may well be overly optimistic when you think of what has happened in other developed Asian societies like Japan, Singapore, South Korea, Hong Kong, Taiwan, where fertility has fallen to the 1.2-1.3 range (and of China, where things may well be heading rapidly in this direction). Increasing education among women and rising living standards may well lead to increasing birth postponement (women having children at later ages) and we already have extensive evidence of the impact of this process on the TFR readout over extended periods of time.

Also life expectancy has been rising, and may well continue to rise more rapidly than the median forecast anticipates.

What all of this means is that if the upside risk to the Thai median age forecast turns out to be the case, then Thai median age could easily be brushing up against the watershed median age of 40 by the time we get to 2020. This age is important, since it seems to mark the frontier between an internal consumption driven society to an export dependent one. If Thailand hasn't made the leap from being a developing to a developed economy by this point her future could become very complicated. So the years to come are critical, which is why we are speaking of "crossroads".

Nowhere is this situation clearer than in the evolution of the 15 to 19 age group (see chart below). Thailand has a "loval peak" in this population around 2012. So during the next few years there will be a growing number of young people entering the labour market. So this is a very good time to get the labour intensive part of the development operation done. Post 2012 Thailand can move progressively towards greater dependence on productivity and TFP (if all goes well that is).

Fortunately, as I indicate in this post on India here, the global environment is likely to be very favourable. In addition Thailand's more recent and measured entry into the low fertility club (unlike, for example, Eastern Europe) means that she is capable (as Claus noted) to run quite rapid growth rates without hitting the solid wall of substantial wage inflation. So she has the wind behind her. Much more than she did in 1998. If we just briefly look at the chart for gross fixed capital formation for a moment.

Now it is very easy to see the massive distortion in investment which took place during the boom of the mid 1990s, how the correction was more or less inevitable, and how Thai Gross Fixed Capital Formation is now on a much lower and more sustainable level. So to some extent the "correction" worked. Also it should be noted that in the mid 1990s Thai median age was somewhere in the mid 20s (like Venezuela, or Ecuador right now, and these are hardly shining examples of political and economic stability). So Thailand was the victim of the Asian financial markets telling themselves the wrong story. Ideas and perpsectives do matter, since they serve to orient behaviour and expectations (those famous compasses and charts that Claus goes on about). Our apparent obsession with median ages isn't simply an obsession, and it isn't all rigmarole and obfuscation, it is part of a search for the "grail" of growth theory, then underlying mechanism.

Finally, just to illustrate what we are talking about, I present my habitual "exhibit A", Thailands population pyramids. These show the age structure transition which is taking place before our eyes clearly enough I think.

OK, that's it. Have a nice xmas everyone, and good luck Thailand, you will need it.

Bibliographic References

Here are some links to economic literature on the demographic dividend.

The Economics of Demographics, special issue of the IMF's Finance and Development Magazine, September 2006.

Especially Booms Busts and Echoes, by David E. Bloom and David Canning

Bloom, David E., and David Canning, 2004, "Global Demographic Change: Dimensions and Economic Significance," in Global Demographic Change: Economic Impacts and Policy Challenges, proceedings of a symposium, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28, pp. 9–56.

Lee, Ronald, 2003, "The Demographic Transition: Three Centuries of Fundamental Change," Journal of Economic Perspectives, Vol. 17 (Fall), pp. 167–90.

National Research Council, 1986, Population Growth and Economic Development: Policy Questions (Washington: National Academies Press).

Bloom, David E., David Canning, and Bryan Graham, 2003, "Longevity and Life-Cycle Savings," Scandinavian Journal of Economics 105, pp. 319–38.

Bloom, David E., David Canning, and Pia Malaney, 2000, "Demographic Change and Economic Growth in Asia," Population and Development Review, 26, pp. 257–90

Bloom, David E., David Canning, and Jaypee Sevilla, 2002, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change (Santa Monica, California: RAND).

Bloom, David E., and Jeffrey G. Williamson, 1998, "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, 12, pp. 419–56.

Mason, Andrew, 2001, Population Change and Economic Development in East Asia: Challenges Met, Opportunities Seized (California: Stanford University Press).

Mason, Andrew, 2005, Demographic Dividends: The Past, the Present, and the Future, Working Paper, Department of Economics, Population Studies Program, University of Hawaii at Manoa

Pyramid Supplement

Thai Baht and US Dollar 2007

2007-12-23T14:11:00.001+01:00

Thailand Employment and Unemployment

2007-12-23T13:42:00.000+01:00

Thailand Consumer Price Index

2007-12-23T13:21:00.001+01:00

Thailand Private Consumption

2007-12-23T13:04:00.001+01:00

Thai Trade Surplus

2007-12-23T12:58:00.001+01:00

Gross Fixed Capital Formation

2007-12-23T12:43:00.001+01:00

Thailand Quarterly GDP

2007-12-23T12:34:00.001+01:00

Thailand Investment

2007-12-23T11:37:00.000+01:00

Thailand Manufacturing Output

2007-12-23T11:36:00.000+01:00

Thailand Retail Sales

2007-12-23T11:10:00.000+01:00

Private Consumption in Thailand

2007-12-23T10:53:00.000+01:00

Thailand Male Life Expectancy

2007-12-21T15:10:00.000+01:00

Thailand Median Age

2007-12-21T15:08:00.000+01:00

Thailand Fertility

2007-12-21T15:06:00.001+01:00

Thailand Population Pyramids

2007-12-21T14:27:00.001+01:00

Thai Capital Flows

2007-12-21T13:36:00.000+01:00

Here is the latest release press from the Bank of Thailand on capital flows:

Mrs. Suchada Kirakul, Assistant Governor, Financial Markets Operations Group, Bank of Thailand, disclosed details about the further relaxation of measures to manage capital flows as follows:

The Bank of Thailand (BOT) has introduced an unremunerated reserve requirement (URR) on short-term capital inflows since 18 December 2006 as a temporary measure to regulate short-term capital inflows, prevent speculation on the Thai baht, and avoid excessive volatility and appreciation of the Thai baht, which are not consistent with Thailand's underlying economic fundamentals. This measure has resulted in improved exchange rate stability, with the baht movements more in line with other regional currencies. Meanwhile, the real and export sectors have been able to better adapt to the exchange rate changes, through diversification of export markets and hedging of foreign exchange risk.

The BOT has been mindful of adverse effects that this measure had on the financial transactions of domestic private sector and foreign investors. This has led to gradual relaxation of the measure in order to increase flexibility in conducting business, such as (1) providing a fully hedge option as an alternative to the reserve requirement, particularly for loans and for investment in fixed income securities and mutual fund units, and (2) waiving the reserve requirement on investments in equity-like securities, namely, warrants and exchange traded fund (ETF) units. In addition, regulations on foreign currency deposit and transfer have been relaxed to increase the flexibility for Thai businesses in managing their foreign currencies and investment abroad, which should lead to more balanced capital flows in the longer term.

Test Post

2006-03-30T16:40:00.000+02:00

This blog is underconstruction.