III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Thailand's economic development policies are based on a competitive, export-oriented, free market philosophy. Its economy is in transition, from an agricultural economy to a more open and broadly based one with a large manufacturing sector. Although the majority of the Thai labor force still depends on agricultural production for the major part of their income, manufacturing, wholesale and retail trade, services and other industries now account for almost two-thirds of the gross domestic product in value terms. Thailand averaged over 10% annual GDP growth from 1988 to 1993. Economic growth in some of Thailand's major markets contributed to slowing growth from the very rapid pace of the late 1980's. However, most fundamentals of the Thai economy remain strong, and Thailand should maintain healthy economic growth for the foreseeable future. GDP growth picked up in 1993 to 7.8% and is projected to increase further to 8.0% this year. Thai GDP was $124 billion in 1993. Per capita GDP was $2,114. Thailand's trade relations have traditionally been oriented toward distant markets, particularly those in North America and Europe. The creation of an ASEAN Free Trade Area, agreed to by ASEAN heads of government at their January 1992 summit meeting in Singapore, may contribute to more rapid growth in Thai trade with its ASEAN partners in the coming years. Thailand has already implemented the first round of duty cuts on very high-tariff goods imported from ASEAN countries. Principal Growth Sectors Manufacturing: Since 1979 Thailand's increasingly diversified manufacturing sector has made the largest contribution to the nation's economy. Real output growth in the sector, 14% in 1990, slowed to about 10% annually in 1992 and 1993. Strongest growth last year was registered in industries producing primarily for domestic consumption, including vehicles and transportation equipment (up 24.8%), construction materials (up 21.4%), petroleum products (up 14.3%) and beverages (up 11.9%). Manufactured exports continue to be dynamic, attributable mainly to substantial growth in export-oriented direct investment and to government policies which encourage exports. Industries registering rapid increases in export production were plastic products, glass, electrical appliances, computer parts and jewelry. Agriculture: Production suffered from a lingering drought and low prices for many products, and grew only 1.7% last year, compared with a 2.9% increase in 1992. Current forecasts call for only 2.0% growth for this year. About 57% of Thailand's labor force continues to be at least partially employed in agriculture, but the sector contributed only 12% of GDP last year. While the sector remains important to the national economic well being, the relative size of agriculture's contribution to GDP will continue to decline. Construction: The building market began to recover last year and construction expanded 11.1%, reflecting a pick up in the demand for housing. The construction sector was seriously overheated during 1990 when it grew 22.7%; a sharp drop in the number of new project starts and softening rents, even in the central Bangkok area, slowed growth to 4.4% in 1992. A large increase in planned public sector spending for infrastructure projects may provide further sector growth, but questions remain as to how rapidly the government will be able to implement the new projects. Tourism: After disappointing results in 1991 and 1992 caused by the Gulf War and domestic upheavals, the Thai tourist industry rebounded in 1993. Last year tourist arrivals surpassed the previous peak of 1990, climbing 10% to 5.8 million. Revenue from tourism last year was $5.5 billion. Others: Output in the mining sector increased by 9% in 1993, owing to the expansion in quarrying and fuel minerals. The trade sector grew 6.4% and the services sector grew 6.2%. Government Role in the Economy The current government led by Prime Minister Chuan Leekpai, which took office following free elections in September 1992, generally has maintained the policy of economic liberalization of previous governments. It has also stressed addressing imbalances created through rapid industrialization by emphasizing rural development and reducing disparities in the distribution of income. The Thai government controls about 65 state enterprises, mainly utility, communication, transportation, and other infrastructure companies. State enterprises employ 250,000 persons. Together with the one million civil servants in Thailand, public sector employment accounts for over a quarter of all salaried employment and 6% of the workforce as a whole. However, growth in government employment has stagnated since the 1970's. The prestige of government jobs has waned and the better pay and benefits of the private sector have led to an exodus of the best trained civil servants. For the past six years Thailand has experienced a substantial government budget surplus as revenues were fueled by a growing economy while government investment expenditures for major infrastructure projects lagged. For 1993 the government's overall surplus reached $2.7 billion, 2.2% of GDP. Since November 1984 the Thai baht has been pegged to a basket of currencies of principal trading partners. The composition of the basket is a closely guarded secret, but the U.S. dollar appears to represent well over half of the value of the basket. The Exchange Equalization Fund, chaired by a Deputy Governor of the Bank of Thailand, determines the exchange value of the baht each working day. There is no parallel market in Thailand. Global currency realignments since 1985, and especially the recent appreciation of the Japanese yen, have tended to make U.S. exports to Thailand more price competitive. The average annual baht/dollar exchange rate has varied in the narrow range of 25.29 to 25.74 since 1987. Balance of Payments Thai exports grew 13.1 % in 1993, the same rate as 1992, to $36.4 billion. Import growth was 12%, about twice the 1992 rate, to $45.1 billion. The trade deficit climbed to $8.7 billion and the current account deficit to $6.7 billion, 5.5% of GDP. The capital account recorded a surplus of $11.6 billion, almost entirely made up of private net capital inflows. The largest increases were in portfolio investment, investment in non-resident baht accounts, and foreign borrowing. The surge in capital inflow was fueled by relatively high returns on Thai equities, large interest rate differentials, and a general confidence in the potential and stability of the Thai economy. Nevertheless, recorded inflows of foreign direct investment declined 27.5% from 1992 levels, to $1.5 billion. The overall balance of payments surplus was $3.9 billion. Official reserves ended 1993 at $25.4 billion, equivalent to about 7 months of imports, up from 1992's level of $21.2 billion, or about 6 months of imports. Total debt outstanding was $40 billion, $14 billion of which was public debt. The overall debt service ratio was 10.2% Trade Barriers High import duties and arbitrary customs valuation procedures remain serious barriers, although Thailand is making some positive revisions in its import regime. The most serious investment barriers are the complicated specifications regulating foreign ownership and control of companies, including several sectors in which foreigners are outright prohibited from participation. See Sections VI and VII for a detailed discussion. Labor Force The labor force in Thailand was 33.1 million at the end of 1993 (defined as individuals age 13 and older). Employment was 32.0 million, and the unemployment rate was 3.3%. Nearly 60% of the workforce remains in agriculture; 28% of the workforce is in services and 12% in industry, the fastest growing sector. The Labor Relations Act of 1975, Thailand's basic labor law, guarantees workers in the private sector most internationally recognized worker rights, including freedom of association. There are about 600 private sector unions registered in Thailand. About 1.2% of the labor force belong to unions or state enterprise associations. State enterprise workers, like civil servants, may not form unions, but are allowed membership in employee associations. The law currently denies the right to strike to civil servants, state enterprise workers, and workers in "essential" services such as education, transportation and health care. In the private sector, collective bargaining usually occurs in individual firms; industry-wide collective bargaining is almost unknown. In 1993, 214,000 days were lost from industrial disputes, down slightly from 1992. The minimum wage is $4.94 per day in the Bangkok area, and slightly less in outlying provinces. Average weekly earnings in major industries were $84.84 in utilities, $87.03 in financial services, $58.44 in manufacturing, $79.24 in construction and $44.75 in commerce, restaurants and hotels. Wages are increasing fastest in the finance and construction sectors, each up over 30% in 1993. (A more complete description of issues affecting the labor movement in Thailand is available from the Embassy's Economic Section.) A major challenge facing Thailand is the chronically low level of education in its workforce. While Thailand has attracted considerable investment in recent years in low-wage, labor intensive industries, those industries are being drawn to lower wage areas in Viet Nam, China, and South Asia. Whether Thailand will be able to continue to attract higher technology industries requiring a well educated, skilled workforce to replace the industries leaving is an open question. Thailand currently experiences shortages of professional level engineers, high technology technicians and managers in many industries. Medium and large factories, including those of most multinational firms, generally meet international health and safety standards. Eight hour days are the norm, and wages and benefits in export industries usually exceed the legal minimum. Most industries have a legally mandated 48 hour maximum workweek. The major exception is commercial establishments, where the maximum is 54 hours. Transportation workers are restricted to no more than 48 hours per week. Infrastructure Situation Rapid growth has had some drawbacks. Infrastructure bottlenecks remain a problem and environmental degradation has worsened considerably in recent years. Thailand's infrastructure bottlenecks and shortages of skilled personnel will limit the pace of future growth. Metropolitan Bangkok's public works (communications facilities, ports, electricity grid, and - particularly - roads and mass transit) are already overtaxed and will come under increasing pressure. A drought in northern provinces may also force reductions in agricultural output dependent on irrigation, and may affect water supplies to the Bangkok Metropolitan area in 1994. The level of education of the workforce will have to be raised to maintain Thailand's development pace and competitiveness with neighboring countries with lower wage rates. Major Infrastructure Projects The Thais are well aware that they need to work on their infrastructure. They have the money to spend on it, and they are investing billions in infrastructure improvements. Thailand will spend more than $60 billion in the balance of this decade on infrastructure, with $30 billion on expanded electrical generating capacity. In addition to building electric power plants, other major projects being implemented are two new oil refineries and petrochemical facilities, a second Bangkok International airport, 6 million telephone lines expansion, mass transit systems for Bangkok and regional centers, new rail and highway development and expansions, new ports development and expansions, development of a new central government administrative city, solid waste and waste water treatment centers for Bangkok and provincial cities.