Thailand's Economy after the Great Flood

Date March 23, 2012
Speaker H.E. Mr. Virasakdi FUTRAKUL(Ambassador Extraordinary and Plenipotentiary of the Kingdom of Thailand to Japan)
Moderator SHINODA Kunihiko(Director, Asia and Pacific Division, Trade Policy Bureau, Ministry of Economy, Trade and Industry (METI))


Virasakdi FUTRAKUL's PhotoVirasakdi FUTRAKUL

This year marks the 125th anniversary of the establishment of diplomatic relations between the Kingdom of Thailand and Japan. Thailand was the first country in Asia to establish diplomatic relations with Japan during the Meiji era, although trade relations date back to the 15th century. At present, Thailand regards Japan as our most important economic partner. Japan is our biggest trading partner, with trade in 2011 totaling about five trillion yen. Japan has a trade surplus with Thailand of about 1.4 trillion yen, and is also Thailand's biggest source of foreign direct investment (FDI). Last year's new investments totaled about 500 billion yen. In the first two months of 2012, Japan invested approximately 100 billion yen in Thailand. The Thai government signed an economic partnership agreement (EPA) with Japan in 2007, which is now up for a review, and will further widen the fields of trade between the two countries. Approximately one million Japanese tourists visit Thailand annually, and conversely, about 150,000 Thai tourists visit Japan. A poll conducted last year showed that the number one favorite destination of Thai tourists was Japan. At present, the Japanese business community in Thailand number between 46,000 and 60,000. It is the largest Japanese business community in Southeast Asia and the second largest community in Asia after Shanghai. In 2010, Japanese businesses in Thailand remitted 350 billion yen to Japan, second in Asia only to that of China of about 520 billion yen. The ties between our two people are very deep.

In 2010, the GDP growth in Thailand was over 7%. Then came the flood. Thailand's GDP in 2011 fell to 0.1%, which showed the gravity of the flood. It also caused the economy to contract by 9% in the last quarter. However, the economy now seems to be on the path to recovery. The International Monetary Fund (IMF) has released this year's GDP growth estimate for Thailand to be more than 5%. The Bank of Thailand has projected growth of 5.7%. When the Deputy Prime Minister for Economic Affairs along with the Prime Minister came to Japan in early March for the first official visit, he stated that he believed that hard work in 2012 would make it possible to increase GDP growth to 7%. We are very hopeful that the Thai economy is recovering gradually.

Looking at the statistics of the Ministry of Industry, up until March, 44% of the factories affected by the flood have now become fully operational. The Ministry projects that all of the affected factories will be fully operational by the third quarter. The fastest sector to recover was automobile as, apart from Honda, most Japanese manufacturers were not seriously affected by the flood. When the flood hit, approximately 990,000 Thai workers were laid off. About 56,000 were laid off permanently, and around 150,000 received pay reduced to 70% of their regular value. The number of workers who have lost their jobs is now about 200,000. This also shows that the Thai economy is gradually improving.

The Thai government and people feel deep appreciation for the assistance received from the Japanese government and people. Japan sent technical teams to help Thailand with the flood. The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) sent 10 water pumping trucks. With the help of the Japan International Cooperation Agency (JICA), we were able to drain the seven flooded industrial estates within two weeks. The Thai government is in the process of accelerating flood prevention measures in preparation for the next rainy season. Our Prime Minister informed Prime Minister Noda that the Thai government has budgeted one trillion yen for immediate flood prevention measures. The government has asked the Government Savings Bank of Thailand to provide loans to all seven flooded industrial estates to strengthen flood prevention measures. These loans will be provided with an interest rate of 0.01% for 15 years. Industrial estates are asked to bear only one-third of the cost of disaster prevention measures, which will not be passed onto the companies and factories in the industrial estates. The Thai government will be responsible for the remaining two-third.

The government has instructed that flood prevention measures be in place by this August, as whenever floods occur in Thailand, they start in the north and arrive in the central plains around Bangkok by the end of September or early October. This year, instead of flooding, the situation may be a reversal of last year, which saw 150% more rainfall than the previous year. This was beyond the capacity of our dams. If the dams had not released their water, there would have been a bigger tragedy. This year, 39 out of 76 provinces in Thailand have been declared drought zones. Be that as it may, the government has learned a lesson and has instructed dams to monitor water levels carefully. We are keeping this level at between 45% and 60% of capacity in order to ensure that the dams will be able to manage increased flows of water in the event of successive rainstorms.

Those are the short-term measures being implemented. Many of them are the result of consultations with JICA, which is working with the Thai government on a long-term plan for infrastructure as well. Long-term measures will take three to five years and will involve a massive transformation of the river basins in Thailand, including the large Chao Phraya. In the northern part of Thailand where the flood started, there will be reforestation, dredging of the rivers, and building of giant water reservoirs, all to ensure that in the future if there is a rush of water from the north, it will not inundate the central plains where most of the industrial estates are located but will be diverted to the west and east.

The government is working to turn the crisis into an opportunity. In addition to the one trillion yen (approximately $12 billion) budget for anti-flood measures, the government has also designated $70 billion over the next five to eight years for projects to renew infrastructure. Most of the investments for these projects will go toward lowering logistics costs. At present, those costs account for about 18% of the cost of goods produced in Thailand. In comparison, in Japan, these costs account for about 4%-5% of total cost. Half of the $70 billion investment will come from the Thai government, and the other half will come from public-private partnerships (PPP). I think that this will be an opportunity for Japanese companies to look into possible participation in PPP projects. The Thai Prime Minister has proposed to Prime Minister Noda that the two governments set up a working group to look into projects and see which ones Japan is interested in participating.

Another project discussed by both governments during the Prime Minister's recent visit was the Dawei Project to establish a deep-sea port next to the Indian Ocean off the eastern coast of Myanmar. Basic infrastructure for this project requires an approximately 700 billion yen investment. The total investment for the entire construction of the port will be approximately 4.8 trillion yen. The economic size of the industrial estate that is envisaged in this area will be eight times the size of Thailand's eastern seaboard. To compare, Thailand's industrialization started with the eastern seaboard development project, which contributed to the country's economic growth at an average of 8% over the last 20 years.

The significance of the Dawei port is not only that it will be a seaport in the Indian Ocean, but also it will have a transportation link from the Dawei port to the Vietnamese ports on the Pacific Ocean, thereby linking for the first time land transportation between the Pacific and the Indian Oceans. This will help reduce transportation costs and will enhance the safety of goods as traffic will not need to go through the Strait of Malacca, becoming a new silk road for Japan.

When the Thai Prime Minister visited, she informed Prime Minister Noda that, while visiting India, she had participated in a discussion with the Indian government on tripartite cooperation between India, Thailand, and Myanmar to improve road transportation links from India, through Myanmar, and to Thailand and the Dawei port. So in the future, we envisage that Japanese cargo ships might unload goods in Da Nang, Vietnam, and transport them by truck or rail across Vietnam, Laos, and Thailand to the Dawei port. From there, cargo ships from South Asia, the Middle East, and Europe would come to pick up the goods. In addition, when the road project is completed, there will also be the option of transporting goods by truck all the way from Da Nang to India. There is also a plan to connect Dawei port on the Myanmar side with the port of Chennai in India. All of this will minimize the cost of transportation for Japanese goods and enhance the safety of transport.

It is hoped that Japan will help invest in the missing transportation links in the Association of Southeast Asian Nations (ASEAN). Thailand already has good rail and road transportation routes. We are planning to build roads from our border to Dawei and have a direct rail link from our deep-sea port in Laem Chabang to Dawei. A rail link is also being planned in southern Laos that will connect to Vietnamese trains and Thai railways. Next month, Japan will host the second Japan-Mekong Summit here in Tokyo. It will be a very good opportunity for Japan to take the lead on work to fill in these missing transportation links.

Questions and Answers

Q: Is the project to link countries by rail and road east-west rather than north-east in any way related to the latest changes in the geopolitical situation? A few comments on this please.

Virasakdi FUTRAKUL
The decision to link transportation systems east-west is not geopolitical, although it does have geopolitical implications. Two years ago, at the ASEAN summit in Hanoi, the ASEAN leaders agreed to the Master Plan on ASEAN Connectivity, which involves three connections: north-south, east-west, and south-east. The north-south connection is from Yunnan to Singapore. At present, the highway linking Yunnan through Southeast Asia to Laos is probably 95% complete. There is only one bridge left to be built. Once it is finished, China will have access from Yunnan all the way to Vietnam and Singapore. China has already proposed soft loans to Laos to allow the government to build a rail connection between Vientiane and Yunnan. Presently, the Thai government is building a rail connection between the Thai border and Vientiane at the request of the Laotian government. This railway connects to the Thai railway system which stretches all the way to the border with Malaysia.

With China so involved in the north-south corridor, it is very important for Japan to become involved in the east-west and south-east corridors. The east-west corridor will link Dawei port to Thailand, Laos, and Vietnam, connecting the two oceans. The south-east corridor is similar, but it will go from Myanmar through Thailand to Cambodia and then to Vietnam. It is very important for Japan to have an active presence in Southeast Asia for geopolitical reasons among others. One implication of the events in Myanmar over the past year is that with the country opening up, mainland Southeast Asia will comprise a sub-region of 250 million people and will be truly integrated for the first time. Japan is helping facilitate this integration through Japan-Mekong projects. The Japanese government has promised to commit $5 billion to develop the Mekong region. Originally, this was focused on Laos, Cambodia, and Vietnam, with Thailand participating as a co-donor with Japan. I believe at the summit next month in Tokyo, we will see Myanmar becoming an active participant for the first time. The sub-region of 250 million people is quite young. Japanese investment, which first came to Thailand about 40 years ago, will be expanded and diversified into mainland Southeast Asia. As such, it is very important from an economic and strategic perspective for Japan to become more involved in this sub-region of 250 million people.

Q: I believe connectivity has three elements: hard infrastructure, person-to-person connectivity, and soft connectivity. Soft connectivity covers issues like free trade agreements (FTAs), and I am very interested in your view on this matter toward the future. I feel that Japanese companies are very good at utilizing the networks of FTAs, not only those held by Japan but also those held by other countries. In that sense, I would like to know what is going on between Thailand and Europe, as well as your thoughts on the expansion of ASEAN-related FTAs.

Virasakdi FUTRAKUL
Let me start by focusing on the soft element of connectivity. In the Japan-Mekong project, the governments of mainland Southeast Asia countries have been discussing the improvement of road, rail, and transport infrastructure. At the same time, the Japanese government has been pushing for the harmonization of customs procedures across the region. I believe that we will see harmonization in the future.

Regarding FTAs, ASEAN now has agreements with all of our dialogue partners: Japan, South Korea, China, Australia, New Zealand, and India. We are moving to the second stage of having a regional FTA. I understand that in addition to its focus on the Trans-Pacific Partnership (TPP), Japan is also interested in helping to accelerate the move toward regional free trade negotiations. The hope has been expressed that these negotiations might be commenced in December 2012. ASEAN has been discussing the concept of an EPA for the region. There are two routes to this: one is ASEAN+3, favored by China, and the other is ASEAN+6, favored by Japan. Hopefully by the end of this year, the picture will be clearer as to which model will be given emphasis.

Concerning Thailand and the EU, negotiations on economic cooperation are ongoing, although not on an FTA. We have also been working with a number of other ASEAN countries to negotiate an ASEAN-EU economic cooperation project.

SHINODA Kunihiko: I would like to know how Thailand would like to promote industrial development in order to lead to economic growth in neighboring countries.

Virasakdi FUTRAKUL
Let me first say that it is the policy of the Thai government to encourage our investors to invest in neighboring countries. We have always believed in the policy of "prospering thy neighbors." When neighbors are prosperous, trade and investment between Thailand and neighboring countries will expand, and there will be political benefits as well. We have already provided a grant of about $300 million-$400 million for the development of infrastructure in neighboring countries. For example, we have improved road connections from our border about 250km inside Myanmar, and the roads will eventually link with Dawei. In the future, again, there will be a $70 billion project to enhance infrastructure. About one-third of this will cover transportation projects improving the links between Thailand and its neighboring countries. 2011 was a watershed year because for the first time Thailand's investments exceeded the FDI coming into it. Most of these investments went to neighboring countries. There will be a greater flow of trade and investment between Thailand and its neighboring countries in the future.

Q: Currently, most of the FDI from Japan to Thailand goes toward the automotive industry. What will happen if Thailand wishes to develop a different industry in the future? In addition, a regional FTA would provide more opportunities for Japanese companies to become involved in Thailand and the region in the future. I would like to know your point of view on the tasks Japan has in front of it with regard to becoming more involved in Southeast Asia.

Virasakdi FUTRAKUL
From 2006-2012, Japanese investment in Thailand went into seven industrial sectors. It is true that the biggest flow was into the auto sector. The total Japanese investment in 2011 was about two trillion yen. About 865 billion yen went to the auto industry. The second largest flow, 500 billion yen, went toward electronics. The third largest flow, 214 billion yen, went into the petrochemical and chemical industries. The fourth was minerals and ceramics: 134 billion yen. Then there was infrastructure and services, 122 billion yen, and agriculture, about 93 billion yen. In actuality, Japanese investments go into seven sectors of our economy.

Thailand is in the same boat as Japan regarding oil imports. As we develop in the future, we will need to diversify our energy resources into renewable energy. At the same time, under the new constitution, for the first time it is mandated that in addition to environmental assessments, any industrial project must also undertake health impact assessment (HIA) studies. This is very progressive and presents an opportunity. Most of the standards being used for the HIA are Japanese. This will open up opportunities for Japan's green technology to be introduced to Thailand. Furthermore, METI is working on building the first ecocity in Thailand, on the eastern seaboard, and will showcase new Japanese green technology. This is the direction that Thailand is headed, in Japan's direction. One of the objectives of the Japan-Mekong development is to transform the Mekong region into a green development area. This will create many opportunities for Japan in the future.

Another task is connectivity. The Japanese government has worked quickly on this. Only six months after the ASEAN leaders adopted the ASEAN Master Plan in Hanoi, the Japanese government handed ASEAN a paper highlighting the ASEAN connectivity projects in which the Japanese government was interested in participating. We were very impressed with how fast the Japanese government studied the connectivity projects and identified the projects in which they were interested. We hope that the Japanese government will do the same with the infrastructure projects in Thailand.

Q: Thailand has floods every year. Today, we learned about hard countermeasures, and I would like to know about soft countermeasures for coping with future floods. I would like to have your comments about education, information dissemination, and other such matters.

Virasakdi FUTRAKUL
In terms of education, there are currently 7,000 Japanese companies in Thailand employing about 700,000 people. In the future, Japanese businesses in Thailand will need another 700,000. This is a challenge because at present, Thailand's unemployment rate is 0.4%. Not only in Thailand but also throughout Asia, there is a social force on students and families to obtain university degrees, such that there are now more university graduates than technical school graduates in Thailand, while the labor force needed in the future will mostly come from technical schools. The challenge is how to convince the young people to enter technical schools. For example, the automobile sector currently produces 1.4 million-1.6 million cars per year. The Thai government has targeted automobile production to rise to 2.3 million cars in the next five years, and Thailand will be among one of the top 10 automobile-producing countries in the world. This will require an additional 150,000 technical workers. We don't have enough technical school graduates to fill those positions.

Right now, there is a debate in Thailand on whether we should have an alternative career route in which we allow technical school graduates to be able to rise to master craftspeople, increasing their pay to a middle-management level, which would help to elevate their wages and status. I have asked JICA to help us with this in Thailand. JICA has said that it will help to strengthen the graduate school system, including research, and I have requested that the organization also assist with technical/vocational schools and teachers' training colleges.

Q: Considering the negative impact of the flood disaster last year, the mainstreaming of disaster management is very important for the enhancement of infrastructure development. It is important that the risk of infrastructure crippling disasters be reduced in order to maintain FDI in Thailand.

Virasakdi FUTRAKUL
JICA is working hand in hand with the Thai government on short-term and long-term disaster management measures. Japan has pledged a grant of eight billion yen to Thailand for disaster management measures. One of the projects this will go to is the elevation of our ring road as an anti-flood measure. MLIT is helping to design an elevated road that can be used as a dyke and connect industrial estates if there is another flood. Thailand attaches great importance to this matter.

SHINODA Kunihiko: You mentioned regional comprehensive economic partnerships, the enhancement of connectivity, and the differences in the approaches of Japan and China. Last year, the United States and Russia joined the East Asia Summit (EAS). Do you have any specific idea about how to involve the United States and Russia in economic integration?

Virasakdi FUTRAKUL
I believe the first half of this question has been answered. The United States is now showing interest in getting involved with the TPP, perhaps envisaging that it will become the FTA of the Asia-Pacific region. The United States will likely be involved in Asia-Pacific regional economic integration in the future.

How Russia will approach this issue remains to be seen. Two-thirds of Russian territory is in Asia. This is why I think that Russia has been included in the EAS. I believe that when the country is ready, it will participate in economic integration. Already, with the world's growing need for energy security, all roads lead to Russia. We should strengthen official links with Russia in terms of energy security. I have not heard anything about Russia approaching ASEAN regarding economic integration.

*This summary was compiled by RIETI Editorial staff.