Why Thailand cannot export its way to prosperity

Ruchir Sharma writes in Malaysian Insider:

. . . . in the effort to protect themselves from any homegrown crisis, these countries ignored the potential negative effects from a falloff in global demand. Malaysia, for instance, continues to gear its economy mainly to manufacture electronic goods, which are now also produced in lower-cost economies including China and Vietnam. Meanwhile, the larger and relatively more advanced economies of South Korea and Taiwan have been unable to shift to a service-sector-oriented model that would allow them to grow at a faster rate. Little wonder that apart from Thailand, Korea and Taiwan are the other developing Asian economies set to contract this year.

History is littered with instances of countries getting stuck at some relatively low per capita income level due to their inability to implement reforms needed to transition to a higher plane. In contrast, Japan reached a much higher per capita income level of US$30,000 (RM105,000) in the early '90s before stagnating, even though exports as a share of GDP averaged only 10 per cent through much of its strong growth phase, while in Thailand exports currently make up 60 percent of GDP and the per capita income level is just US$4,000. Japan's greater success was due to the fact that in the 1970s and '80s its policymakers focused on creating the right conditions for a virtuous domestic investment and consumption supercycle.

The "exporting your way to prosperity" model served many of the East Asian economies well when US demand was ripping ahead, and some of the large emerging markets, such as India and Brazil, were still only marginal players in the export markets. But now, with the developed world set for a protracted period of subpar growth and newly emerging economies including Vietnam and Bangladesh arriving on the global scene to get a piece of the action in the low-value-added export segment, it's time for economies like Thailand to seek new direction. Otherwise, they risk becoming just nice places to visit — and not even that when their restless people are blocking the airports.

There is every reason to critical of some Asian countries over-reliance on exports as central to their growth strategy, in so far local investment opportunities have been neglected. Even when export-based growth strategy seemed to be succeeding in the short-term, it was obvious to this observer that inadequate investment in public transportation infrastructure, education, and environmental safeguards was curtailing the sustainability of progress in Thailand. Bangkok has literally been choking on its prosperity -- and needlessly so. Regardless of the -- now apparent -- vulnerabilities of any export-led growth strategy to fluctuating demand within the global marketplace, neglecting societal needs was a mistaken approach from the beginning.

One thing quite striking -- shocking? almost -- is the statistic that some 60 percent of Thailand's GDP is attributable to exports. (I checked the figure with the CIA World Factbook, and based on 2008 figures the percentage comes out to 64%). By contrast, the only about 20% of US GDP is attributable to exports; for resource-rich Canada, the figure is 43%.

Historically, one of the world's most successful exporters is Germany. A historical overview shows:

It was the world's largest exporter in 1988, second largest after the United States in 1989, and first again in 1990 if East German exports before monetary unification in mid-1990 are included. West Germany was also consistently one of the world's largest importers.

The German economy has failed to heed the export mystique only once, when the Hitler regime (1933-45) sought autarchy, or economic independence from the global economy. Between 1910 and 1913, exports accounted for 17.8 percent of Germany's GDP. Their share declined to 14.9 percent in the second half of the 1920s and fell to only 6 percent in the second half of the 1930s, but by 1950 accounted for 9.3 percent of West Germany's GDP. Once the postwar economic boom got under way, exportsrose to 17.2 percent of GDP in 1960, to 23.8 percent in 1970, to 26.7 percent in 1980, and to approximately 33 percent in 1990.Investment goods produced by West German industry were the most successful export items and contributed most heavily to the country's large trade surplus, although West Germany was competitive across a wide range of goods.

History shows that highly successful exporting states such as the US, Germany, and Japan have never even approached Thailand's level of dependency on exports as a percentage of GDP.

Incidentally, in Latin America, only one country -- Panama -- is as dependent on exports as Thailand. Some sixty-four percent of Panama's GDP is attributable to exports.