Thailand’s economy stuck in the middle

Author: Richard Yarrow, Harvard University and ANU

Southeast Asia’s second-largest and once one of the most dynamic economies struggles with an aging population, a deteriorating education system and under-yielding rice cultivation. Thailand seems trapped as a middle-income country unable to get rich, stuck between a younger, more dynamic Vietnam and larger Indonesia.

Thailand's Prime Minister Prayut Chan-ocha prays at a shrine at the Ministry of Interior in Bangkok, Thailand on October 3, 2022 (Photo: Reuters/Chalinee Thirasupa)

Breaking out of the economic rut will not be easy, but investing in education and higher-quality human capital, as well as agricultural and governance reforms, should be priorities.

Thailand has the lowest fertility rate in Southeast Asia, with the exception of Singapore. Its demographics are arguably more concerning than South Korea’s, which has a fertility rate of nearly 0.8. Between 2000 and 2021, South Korea’s population aged 20 to 24 fell by 15 percent. In Thailand, that figure fell 20 percent, slightly better than Japan’s 27 percent drop. But Japan and South Korea generate more than four times Thailand’s GDP per capita, and they have more resources to support aging citizens and attract skilled immigrants to bolster an aging workforce.

As in many other countries, COVID-19 has exacerbated Thailand’s aging. Between 2020 and 2021, the number of Thai infants fell by 8 percent. Middle- and working-class households, stressed by mounting debt, inflation and poor job prospects, are reluctant to have more children. During the pandemic, Thai household debt rose to 90 percent of GDP.

In the 2000s, Thailand outperformed its regional peers in many educational metrics. Almost all eligible children attended primary school, and a high proportion of young people attended upper secondary school. Most Thai workers in 2006 had at best a primary education. By 2019, most had tertiary education.

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These advances in education and skills can help mitigate the effects of rapid aging. However, the acceptance and quality of higher education is critical to building human capital and breaking out of the middle-income trap. Over the past decade, the decline in university enrollments has begun to outpace the demographic decline in the number of young people.

Thailand’s gross tertiary enrollment rate – the number of tertiary enrollments in the main tertiary age cohort – peaked at around 50 percent in the early 2010s and then fell to 40–45 percent in recent years. Technically or professionally oriented programs performed better, but most general university programs lost many students. Between 2015 and 2019, enrollments for undergraduate programs fell by 18 percent.

The problems of Thai universities relate to quality, jobs and household finances. With fewer enrollments, universities have fewer resources and incentives to invest in improving quality like Chinese or Singaporean universities have done. Conversely, job prospects for college graduates have deteriorated. The wage premium of Thai higher education has fallen since the early 2010s as many graduates are under-prepared for the job market.

During the pandemic, the number of unemployed graduate workers has more than doubled. For indebted households, the extra years of college education may no longer seem rewarding. Many Thai universities are faced with the task of cutting programs or closing them entirely.

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Agriculture, still a major pillar of Thailand’s economy, is another concern. The sector contributes about a tenth of Thailand’s GDP but employs about a third of the labor force. While the sector has diversified towards fruit and livestock farming, rice remains a core crop – Thai farms account for 14 percent of the international rice trade. Still, Thailand’s rice farms are not very productive or efficient. Thailand’s average yields are now lower than those of Vietnam, Cambodia and Laos. The average Thai rice farm is too small and the farmers too poor or too old to invest in the equipment or infrastructure to increase productivity.

These challenges have prompted policymakers to rely on new industrial technologies to revive economic growth. For example, political leaders dream of a shift to electric vehicle manufacturing, and in May 2022 Prime Minister Prayut Chan-o-cha expressed hope that Thailand would become the world’s largest electric vehicle manufacturing hub. But a purely national strategy focused on electric vehicles would be a costly gamble in a region where few consumers can even afford the technology.

Thailand and its auto industry in particular are benefiting from large investments from Japan and China. Thailand’s exports have performed well since 2020, with rising vehicle sales to Japan and agricultural exports to China. Foreign investment-driven trade has given a strong economic boost and opens up opportunities for structural change. But foreign investment is deterred by an uncertain legal and political environment, corruption, powerful domestic oligopolies and restrictions on foreign ownership. The Eastern Economic Corridor and Special Economic Zones created under recent governments have yet to expand or deepen investment in Thailand.

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The rejuvenation of higher education requires reform of higher education funding, consolidation and internationalization of their higher education institutions.

Easing agricultural stagnation requires a shift from farm price support to mechanization, investment in irrigation, and farm consolidation.

The challenges of Thailand’s demographics, education and agriculture seem symptomatic of an unequal economy, with resources and power concentrated around large conglomerates and the wealthy. Such an economic structure constrains demand from the middle class and increases capital outflows to neighboring countries like Vietnam, even if Thailand is underprivileged by domestic private investment. Likewise, there is little incentive for students or farmers to improve their skills and little support for families to have children.

Changes in direction are, at their core, a governance and political issue. Many Thailand 4.0 proposals – for example for regionally balanced investments and joint partnerships to channel resources into higher education – show that there is no shortage of good ideas from Thai officials and academics on what is needed. But its implementation is another matter.

Richard Yarrow is a Fellow at the Mossavar-Rahmani Center at Harvard Kennedy School, a Visiting Research Fellow at the ANU East Asian Bureau of Economic Research, and a Visiting Research Fellow at the East Asian Institute at the NUS. He recently published the monograph Thailand’s economic dilemmas in Asia after the pandemic.


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