THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL January 2019 World Bank Office – Bangkok Country Director: Mara Warwick Country Manager: Birgit Hansl Director: John Panzer Manager: Ndiame Diop 30th Floor, Siam Tower 989 Rama I Road, Pathumwan Bangkok 10330, Thailand (662) 686-8300 www.worldbank.org Acknowledgements This report was prepared by Kiatipong Ariyapruchya (task team leader), Kevin C. Chua, Mahama Samir Bandaogo, Dilaka Lathapipat, Sutayut Osornprasop, and Judy Yang. Mara Warwick, Birgit Hansl and Ndiame Diop provided overall guidance. Valuable comments were provided by Sudhir Shetty, Salman Zaidi, Toby Linden, Gabriel Demombynes and Ergys Islamaj. We would like to acknowledge valuable contributions from Arvind Nair, Rattanyu Dechjejaruwat, Thanapat Reungsri, Shiyao Wang (all WB) and Pensiri Kangvongkit (Office of the Prime Minister). Kanitha Kongrukgreatiyos and Buntarika Sangarun led external communications and the production and design of the report while Angkanee Luangpenthong provided administrative support. Valuable comments and information were provided by officials of the Bank of Thailand, the Ministry of Finance, the Budget Bureau and the National Economic and Social Development Council. Enquiries Please contact Kiatipong Ariyapruchya (kariyapruchya@worldbank.org), Kevin C. Chua (kchua1@worldbank.org), or Mahama Samir Bandaogo (mbandaogo@worldbank.org) if you have any comments. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL January 2019 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 PART 1: MACROECONOMIC DEVELOPMENTS AND OUTLOOK 11 A. The Thai Economy in 2018 11 Real sector development: robust domestic demand amid weak external environment 11 Fiscal policy development: expansionary stance 15 Monetary and Financial sector development: maintaining an accommodative stance 17 External sector development: heightened uncertainty and volatility 21 Poverty and Unemployment: long-run poverty reduction has been positive 23 B. Outlook for 2019–2020 26 C. Emerging Risks 30 D. Policy Watch 30 PART 2: EQUITABLE INVESTMENT IN HUMAN CAPITAL IS VITAL TO THAILAND’S CONTINUED ECONOMIC DEVELOPMENT 41 Poverty and Inequality Reduction Has Stalled 41 Inequality among Children Can Have a Lifelong Impact 45 Equalizing Opportunities for Human Capital Development Can Help Reduce Social and Economic Disparities 46 The Human Capital Index Measures the Expected Productivity of the Next Generation 46 Uneven Education Quality Is a Serious Obstacle to the Development of Human Capital 52 Targeted Reforms Can Enhance the Impact of Education on Productivity 54 School consolidation 54 School management 54 Expenditure efficiency 55 Thailand Has Achieved Considerable Success in Reducing the Incidence of Stunting and Improving Nutrition Indicators 59 New Health and Nutrition Challenges Are Emerging 62 To Realize the Full Potential of Its Human Capital, Thailand Must Address a New Set of Health Challenges, Especially Teenage Pregnancy 64 Conclusion 65 REFERENCES 69 BOXES Box 1: A Small Area View of Poverty 25 Box 2: Thailand’s Budget for Fiscal Year 2019 32 Box 3: The United States-China Trade War: How will Thailand Fare? 34 Box 4; The New Budget Procedures Act and its Implications 37 Box 5: Measures of Inequality in Thailand 43 Box 6: The Contribution of Education to East Asia’s Extraordinary Growth 47 Box 7: The Human Capital Index: Data and Measurement 50 Box 8: Lessons from the Best-Performing Schools in East Asia and the Pacific 57 Box 9: Factors Contributing to Thailand’s Success in Addressing Stunting in the Late 1980s and 1990s 60 Box 10: Reforming Institutions for Tackling Inequality in Thailand 66 FIGURES Figure 1; GDP growth decelerated to 3.3 percent in the third quarter … 12 Figure 2; … mainly due to a drastic fall in exports. 12 Figure 3: Private consumption has been on an upward trend during the first 9 months of 2018 … 13 Figure 4: … and so has private investment. 13 Figure 5; Production Side GDP Growth Composition 13 Figure 6: Exports slowed down across the region. 15 Figure 7: Inflation has been kept at low and manageable levels 16 Figure 8: Rising energy prices in the global market impacted prices in transportation and communication. 16 Figure 9: Corporate and consumer loans grew faster in the first three quarters of 2018. 18 Figure 10: Household debt as a share of GDP has slowly fallen since 2015. 18 Figure 11: Household debt classified by region 19 Figure 12: Household debt classified by income 19 Figure 13: The Thai baht weakened starting the second quarter of the year. 20 Figure 14: The Thai baht’s real effective exchange rate appreciated more than the regional peers’. 20 Figure 15: A smaller current account surplus, coupled with capital outflows, have narrowed the balance of payment surplus. 22 Figure 16: Among regional peers, the CDS spread is the lowest in Thailand. 22 Figure 17: Gross international reserves can cover three times the short-term external debt. 22 Figure 18: Tambon-level small area poverty estimates, and Province-level number of poor, 2015 25 Figure 19: The Thai economy is projected to grow at 4.1 percent in 2018. 27 Figure 20: Leading economic indicator shows a plateauing in 2018. 27 Figure 21: The private consumption index reflects a rising trajectory. 27 iv THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 22: The total value of mega-infrastructure investment projects peaks in 2021. 29 Figure 23: The Business Sentiment Index has been upbeat since 2017. 29 Figure 24: On a quarter-on-quarter basis, the Thai baht depreciated in the second and third quarters. 35 Figure 25: Thailand holds a high degree of similarities of exports basket to the US with China for affected products. 35 Figure 26: Potential replacement of Chinese exports to the US by Thailand is lower than other peers. 36 Figure 27: EAP countries including Thailand will be affected by the reduced Chinese demand for intermediates. 36 Figure 28: Estimated Public and Private Investment Needs for the Eastern Economic Corridor 38 Figure 29: Measures of Inequality, Thailand and Global Comparators, 2015 42 Figure 30: Share of Survey Respondents Who Report That Their Standard of Living Is Improving 42 Figure 31: Share of consumption/ income held by the top 1 percent, by data type and source 43 Figure 32: Performance on the Human Capital Index by Indicator, Thailand and Comparators, 2018 48 Figure 33: Human Capital Index Scores and Rankings, Thailand and Comparators 51 Figure 34: Thailand’s Actual HCI Score and Predicted HCI Scores Based on Alternative PISA Scores 51 Figure 35: The Learning Gap, Thailand and Comparators 52 Figure 36: Learning-Adjusted Years of Schooling by per Capita GDP 52 Figure 37: Human Capital Index Components, Thailand 53 Figure 38: PISA Scores for Science by Household Income Level and Location 53 Figure 39: Average PISA 2015 Science Scores and Public Spending per Student, Thailand and Comparators 56 Figure 40: Stunting Rate, Thailand, 1987–2017 59 Figure 41: Multisectoral Interventions to Address Child Undernutrition in Thailand 62 Figure 42: Leading Causes of Premature Death in Thailand, 2007 and 2017 63 Figure 43: Survival Rates and GDP per Capita, Thailand and Comparators 63 Figure 44: Predicted Probability of Stunting among Children Ages 6–23 Months by Cause 64 TABLES Table 1: Selected Fiscal Data 16 Table 2: Balance of Payments (Q1-Q3 2013 – Q1-Q3 2018) 21 Table 3: Selected Economic Indicators 26 Table 4: Value of US imports from China targeted by the tariff measures 34 Table 5: Key Draft Bills to Empower Community and Narrow Rural-Urban Gaps 67 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL v vi THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL EXECUTIVE SUMMARY Recent Economic Developments In addition, private investment grew by 3.9 percent in the third quarter supported by increased spending The outlook for the global economy has darkened on construction, machinery and equipment. Strong amid elevated trade tensions. International trade domestic demand offset partially adverse global and investment are moderating, trade tensions factors—the China-US trade dispute—as well as remain elevated, and financing conditions are domestic and idiosyncratic factors—such as the tightening. Global growth is projected to moderate Phuket boat tragedy and the high-base effect of gold from a downwardly revised 3 percent in 2018 to exports. The Thai economy also owed its resiliency to 2.9 percent in 2019 and 2.8 percent in 2020–21, as strong and stable macroeconomic fundamentals. economic slack dissipates, monetary policy tightens in advanced economies, and global trade gradually slows (World Bank Global Economic Prospects, Outlook and Risks January 2019). In line with trends in the global economy, a slight economic slowdown is expected in 2019. The Despite external shocks to trade and tourism, Thai economy is projected to slow to 3.8 percent growth of the Thai economy is estimated to have in 2019, ticking up only slightly to 3.9 percent in accelerated to 4.1 percent in 2018. The economy 2020. Economic growth will continue to rely mainly proved to be resilient in the face of strong global on domestic demand as exports will be adversely headwinds due to strengthening domestic demand affected by slower global demand. In this context, stemming from an upswing in private consumption public infrastructure projects and continued planned and private investment. Domestic consumption economic reforms are expected to catalyze domestic expanded by 5 percent in 2018Q3, posting the demand in 2019 and support medium-term growth. highest growth rate in 22 quarters in a low-inflation environment and record-low unemployment. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 1 The balance of risks is tilted to the downside. The Continued progress in lowering poverty will depend US and Chinese economies could slow further due to on productivity gains. As an upper middle-income trade tensions. There is thus a risk that a continued country in developing East Asia and Pacific, Thailand slowdown in external demand may undermine accordingly has one of the lowest levels of extreme Thailand’s exports. In response, investors may hold poverty as measured by the International Poverty back private investment in export industries as Line ($1.90/day 2011 PPP). At the higher and more well as related industries amid heightened global relevant upper-middle-income class poverty line, uncertainty. In addition, the recent and expected ($5.5/day 2011 PPP), Thailand’s poverty rate of interest-rate hikes in the US and in some of the 7.1 percent in 2015 is similar to its wealthier developed economies could lead to some financial neighbor, Malaysia. Poverty is expected to decline market turbulence and sudden retrenchment of at a slower rate in rural areas in the medium term capital inflows from emerging market economies. On as agricultural prices are not expected to reach the domestic front, persistently low disbursement highs observed in recent years due to the global rates of the capital expenditure budget, fiscal commodity cycle. Growth could become less inclusive, fragmentation and political uncertainty all remain with the rural poor negatively affected unless risks for timely implementation of planned large agricultural productivity increases. In addition, rural public infrastructure projects. households are aging rapidly as younger generations have migrated to urban areas. Fiscal and monetary policy stances are expected to remain accommodative and macroeconomic stability maintained. Headline inflation is unlikely to deviate from the target range of 1–4 percent amid anchored inflationary expectations and a gradual recovery. Monetary and fiscal buffers are expected to remain adequate with room for further expansion to support economic activity, if needed. Moreover, public debt remains low at 42 percent of GDP. The Thai baht showed less volatility during the recent Turkish currency crisis compared to Indonesia and the Philippines, due to a strong current account surplus (8.1 percent of GDP) and the largest foreign exchange buffer in ASEAN (74 percent of GDP). 2 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Sustaining the pace and quality of structural The Government of Thailand has recently set up reforms will be crucial for reducing poverty and a special unit under the National Economics and raising Thailand’s long-term growth path above Social Development Board to help devise and 4.0 percent in the face of demographic headwinds implement strategies to tackle social disparities from rapid aging. The government’s 20-year and inequality. Part 2 aims to inform these efforts strategic plan for long-term growth is envisaged by highlighting how important it is for Thailand to to help ensure administrative consistency and develop the human capital of its next generation in coordination across agencies as well as continuity an inclusive manner. Strengthening the health and across governments. Continued reforms in core areas skills of low-income groups in Thailand can go a long such as public investment management, education, way in reducing inequality. Indeed, a recent study competition and services liberalization will be by the World Bank reviewed the experience of five particularly important to raise productivity growth countries with strong records in narrowing income across all segments of society and raise Thailand inequality and highlighted the key role that labor from middle- to high-income status. markets can play in reducing inequality by providing better opportunities to disadvantaged groups (World Bank, 2016c; Narayan et al 2018). Inequality, Opportunity and Human Capital Access to human capital is an important tool for narrowing future income gaps. At its 2018 The second part of this report sheds light on Annual Meetings, the World Bank has released the Thailand’s challenges and opportunities in Human Capital Index (HCI), which measures the enhancing human capital and reducing inequality. expected productivity level for the next generation While Thailand’s level of inequality as measured by of workers relative to their full potential if all health the Gini coefficient is comparable to peers, inequality and education outcomes were realized (World Bank, remains an issue that has become a national priority. 2019). Thailand’s HCI is 0.60 out of a possible score Income inequality can harm development in two of 1, which can be interpreted as “A child born today major ways: unequal economic opportunities lead in Thailand can expect to be only 60 percent as to wasted productive potential, and it typically also productive as a future worker compared to if she results in impaired institutional development which enjoyed complete education and full health”. While in turn is bad for investment, innovation, and Thailand generally scores in the upper half of the risk-taking.1 various indicators compared to its ASEAN and other upper-middle income country peers, there is substantial room for further improvement. For example, in adult survival rates between ages Riding the Wave: An East Asian Miracle for the 21st 1 15–60, Thailand’s rate is lower than over half of Century (World Bank, 2017). measured countries in the world. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 3 The country faces new health challenges, including the rise in non-communicable diseases (NCDs). Across Thailand, only 85 percent of 15-year-olds will survive until age 60. This is lower than the For Thailand, unequal education quality is a big global median, below the average 86.2 percent of its challenge, with poorer areas being underserved. income group, and only around average of ASEAN Small under-resourced schools with inadequate countries. The high burden from NCDs and road infrastructure and education materials are mostly traffic injuries, which caused premature deaths, has located in poorer regions of the country where affected the country’s adult survival rate. Thailand they predominantly serve the socioeconomically has encountered the fast-moving epidemiological disadvantaged student population and are transition to NCDs, which have become the leading more likely to be allocated teachers with lower cause of deaths accounting for an estimated qualifications and teaching experience (Lathapipat 82 percent of all deaths among Thai people in 2013.2 and Sondergaard, 2015). Thailand’s HCI harmonized While mortality and morbidity from communicable test score is lower than the ASEAN average. A Thai diseases have decreased, prevalence of diabetes and child born today can expect to obtain 12.4 years hypertension has tripled and quadrupled respectively of school before the age of 18. However, the same in the past 15 years. Thai child can expect to complete only 8.6 learning-adjusted years of schooling, indicating a learning gap of 3.8 years. 2 Burden of Disease Thailand program, 2017.  4 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Reducing inequality of opportunities can set in motion a virtuous cycle. When the outcomes of children become less tied to the circumstances of their birth or the characteristics of their parents, To achieve higher economic development, inclusive relative mobility is high, inequality traps are broken, and equitable investment in the next generation economic growth is stimulated. These positive will be crucial and can start by addressing some changes foster a more inclusive process of growth, priority areas in education, health, and equalizing and in turn help mobility rise further. A virtuous opportunities. Thailand’s aspirations to ascend to an cycle is reinforced as it promotes social cohesion as advanced economy face the difficult challenge of a people no longer feel excluded from progress, have rapidly aging society, low education quality, regional improved perceptions of fairness and optimism, and differences in access and quality of education, can more realistically meet their aspirations. For and emerging health challenges. In education, example, in countries with greater relative mobility in strategies include addressing small schools where education, parents are found to be likely to be more approximately 1 million (mainly poor) children, on optimistic, with a larger share believing that their average, are currently getting an inferior quality children have the opportunities to learn and grow education, improving school-based management, (Narayan et al 2018). Reducing inequality has been and increasing the efficiency of public education empirically linked to boosting economic growth in expenditures. Promoting healthier outcomes is some countries, though a global relationship has essential as Thailand’s adult survival rate is lower not been found (Ferreira et al. 2013; World Bank than half of countries worldwide. Lastly, investment 2006, 2016c). When society is more unequal, higher in human capital must be equitable to boost growth rates are required to reduce poverty opportunities for all in the next generation. (World Bank 2016c). THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 5 Summary charts Exports slowed across the region… 30.0 Export value YoY growth rates, 12-month moving average 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 2015 2016 2017 2018 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep China Indonesia Malaysia Philippines Thailand Vietnam ...weighing on Thailand’s export-led recovery 8.0 6.0 Contribution to growth (percent) 4.0 2.0 0.0 -2.0 -4.0 -6.0 2013 2014 2015 2016 2017 2018 Residual Inventory change Total consumption Gross fixed capital formation Net foreign demand 6 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL ...as private consumption continued to steadily recover, offsetting sluggish external demand... 6.0 5.0 Private consumption Year-on-year growth 4.0 3.0 2.0 1.0 0 2016 2017 2018 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q4 ...amid improving co-incident and leading indicators... 160.0 Co-incident and leading economic indices 150.0 140.0 130.0 120.0 110.0 100.0 2012 2013 2014 2015 2016 2017 2018 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Coincident economic index Leading economic index …as ambitious public investments are expected to pick-up and improve investor sentiment… 700 Public investment (billion baht) 600 500 400 300 200 100 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 7 …despite lingering concerns about still-high household debt. 85.0 Household debt (percent of GDP) 80.0 75.0 70.0 65.0 60.0 55.0 50.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Macroeconomic fundamentals are bolstered by anchored headline and core inflation... 2.5 2.0 1.5 Inflation year-on-year 1.0 0.5 0.0 -0.5 -1.0 -1.5 2015 2016 2017 2018 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Core inflation Headline inflation Key policy Nov ...exchange rate volatility tempered by strong current account surplus and high foreign reserves. 105.0 100.0 Nominal exchange rate index 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 2015 2016 2017 2018 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct China Indonesia Malaysia Philippines Thailand Vietnam 8 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Reducing inequality is a national priority. Right now, do you feel your standard of living is getting better? (Share of the population) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2016 2017 2018 Vietnam Lao PDR Thailand Cambodia Malaysia Mongolia Myanmar Indonesia China Philippines Source: Gallup. Thailand’s level of inequality is comparable However, children in poor or rural households to peers based on its level of development. have worse access to quality education. 0.6 2015 Income-based Gini coefficient (circa 2015) Top Socio-econ 20% 0.5 Bottom 0.4 20% 0.3 Large city Rural-urban 0.2 0.1 Village 0 7 8 9 10 11 12 350 380 410 440 470 500 log (GDP per capita, 2015) Thailand PISA scores by group in 2015 Source: PovcalNet Source: OECD Thailand’s Human Capital Index value is But Thailand’s quality of education is lower above the ASEAN average. than the ASEAN average. Singapore Singapore Vietnam Vietnam Malaysia Malaysia Thailand Cambodia ASEAN Average ASEAN Average Upper middle income Thailand Philippines Upper middle income Indonesia Myanmar Cambodia Philippines Myanmar Indonesia Lao PDR Lao PDR 0 0.2 0.4 0.6 0.8 1.0 0 200 400 600 Human Capital Index Ranking Harmonized Test Score Ranking THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 9 10 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL PART 1 MACROECONOMIC DEVELOPMENTS AND OUTLOOK A. THE THAI ECONOMY IN 2018 Real sector development: robust domestic demand amid weak external environment The global economy is estimated to have expanded by 3.1 percent in 2018, despite a slowdown in global trade. This growth dynamic is slower than the EAP region’s (6.3 percent) and economic growth rate estimated for emerging markets and developing economies (4.5 percent). While the estimated growth of the Thai economy in 2018 (4.1 percent) was higher than global growth, it lags behind the growth performance of the EAP region. Thailand’s GDP continued to expand in 2018, supported by a strong uptake in domestic demand, in particular private consumption. After an extended period of slow growth, private consumption was on an upward trend in 2018 and has supported the expansion of the Thai economy. Private consumption grew by 5 percent in the third quarter of 2018, up from 4.5 percent in the second quarter (Figure 3). The expansion in private consumption was supported by several factors: 1) household incomes improved, which fueled spending on semi-durable and non-durable goods; 2) low inflation and high consumer confidence; 3) increase purchases of new cars due to the end of the 5 years requirement of ownership under the first car buyer scheme, which was implemented in 2012. The purchase of passenger car grew by 25.15 percent in the second quarter; and 4) welfare spending targeted at low-income people. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 11 In addition to private consumption, domestic The expansion in public investment came mainly investment was also in an upswing in 2018. Gross from public construction, which rose by 4.2 percent fixed capital formation grew by 3.9 percent in in the third quarter compared to just 1.5 percent the third quarter of 2018, from 3.6 percent in the in the previous quarter. Acceleration was due to second quarter. The expansion in gross fixed capital increased procurement of small and medium-sized was supported in equal parts by growth in both projects which started to take off after the initial public and private investment. Private investment “teething period” of the new procurement law which expanded by 3.9 percent and public investment came into effect in August 2017. However, spending by 4.2 percent. Growth in private investment was on large infrastructure projects has been slower supported by a healthy expansion in construction compared to last year. The disbursement rate and the purchase of machines and equipment of capital expenditure was documented as (Figure 4). This marks a significant acceleration 70.5 percent, missing the official target by in private investment growth compared to only 1 17.5 percent. Also, the purchase of public machinery percent growth in 2016 and a contraction of one and equipment decelerated from 13.6 percent in percent in 2017. the second quarter to just 4.1 percent in the third quarter due a high-base effect from the purchase of several aircraft by Thai Airways in 2017. Figure 1: GDP growth decelerated to 3.3 percent in the third quarter… GDP growth (year-on-year) 6 5 Year-on-year growth 4 3 2 1 0 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: NESDB. Figure 2: … mainly due to a drastic fall in exports Exports growth (year-on-year) 8 Year-on-year growth 6 4 2 0 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: NESDB. 12 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL  rivate consumption has been on an upward trend during the first 9 months of Figure 3: P 2018 … Private consumption growth (year-on-year) 6 5 Year-on-year growth 4 3 2 1 0 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: NESDB. Figure 4: … and so has private investment private investment growth (year-on-year) 6 Year-on-year growth 4 2 0 -2 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: NESDB. Figure 5: Production Side GDP Growth Composition 8 6 Year-on-year growth 4 2 0 -2 -4 Wholesale Hotels and Transport Real Estate Construction Agriculture Fishing Mining and and Retail Restaurants and … and Renting Quarrying Source: NESDB. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 13 Growth of external demand decelerated abruptly imports and the slowdown in exports caused the in the third quarter of 2018 to 2.6 percent from trade surplus to shrink to US$3.4 billion, from 12.3 percent in the previous quarter and export US$5.8 billion in the previous quarter. volume shrank by 0.4 percent (Figure 2). The value of manufacturing exports decelerated in the third Reflecting the slowdown in exports, growth in quarter to 6.7 percent from a high of 10.7 percent manufacturing production declined by half in the in the previous quarter. In addition to the China-US third quarter compared to the previous quarter, trade tensions, other short-term factors contributed from 3.2 percent to 1.6 percent. The decline in to the weak growth in exports (e.g. production export growth cascaded into weaker manufacturing disruption of major export commodities due to activities in export-linked industries. The growth flooding, and high base for gold exports) and tourist in manufacturing production slowed down, from receipts (e.g. the Phuket boat tragedy3). Exports to 7.0 percent in the second quarter to 2.3 percent China fell by 2.8 percent and those to Australia by in the third quarter in industries with exports 5.7 percent. This slowdown in exports is not isolated share between 30 and 60 percent of their total to Thailand as exports slowed down across the production. At the same time export-oriented region (Figure 6). However, exports to ASEAN saw industries, those with exports share above 60 the fastest growth in 28 quarters, to 22.3 percent, percent of their production expanded by 1.5 percent which more than made up for the fall in exports to in the third quarter. Furthermore, while production China, Australia and the United States. in domestic oriented industries rose by 1.9 percent in the second quarter, it shrank by 0.8 percent in The growth of number of foreign tourists slowed the third quarter. Production capacity fell from down in the third quarter, to only 1.9 percent, 67.1 percent in the same quarter last year to 66.5 compared to 8.4 percent in the previous quarter. percent in the third quarter, but four industries This contributed to the lower growth rate of including plastics and synthetic rubber, automobile, 0.5 percent in foreign tourism receipts. Among petroleum and meat processing, had capacity other things, the slowdown in the number of utilization of at least 80 percent in the third foreign tourists was due to the boat accident in quarter. The business sentiment index at the end Phuket and the summer FIFA World Cup, which of October stood at 49.6, having dropped from 51.5 attracted European tourists away from Thailand. the previous month. However, the expected business The number of Chinese tourists went down by sentiment was at 54.2, meaning that expectations 8.8 percent, mostly likely due to the boat accident, about future business had improved compared to but also to some extent because of the slowdown the previous month.4 of the Chinese economy, which may pose a threat to the Thai tourism industry in the long run if it Growth in agricultural production slowed to 4.3 continues. However, the low number of Chinese percent in the third quarter of 2018, from 10.2 citizens with a passport (about 10 percent) and percent in the second quarter, compared to 9.7 the low number of Indian tourists currently coming percent in the third quarter of 2017. The relatively to vacation in Thailand (fewer than a million) as lower commodity prices in 2018 softened incentives well as the concentration of tourism in Bangkok, for greater agriculture production. The agricultural Phuket and Chiang Mai suggest that there remains price index fell by 3.3 percent due to lower price considerable upside potential to the Thai tourism of rubber, sugarcane, poultry and white shrimp. industry in the long term. The oversupply of rubber is putting a downward pressure on the price of rubber, which is expected In line with the rise in domestic demand, imports to remain low given the continued increase in expanded, supported by increased imports of production from mature rubber trees, planted a consumer goods, raw materials and intermediate few years ago when rubber prices very high. goods. Import value, measured in US dollar, Agricultural income rose for the second consecutive expanded by 17 percent in the third quarter. Import quarter and the farm income index was up by price was up 6.2 percent and import quantity 10.2 1.3 percent in the third quarter. This is a particular percent. The import of capital goods saw a decline upside for those in the bottom 40 percent of of 5.9 percent, mainly due to a high base effect the income ladder, who had seen their income from the previous year. The faster expansion in deteriorate in recent years. 3 O  n 5 July 2018, two tourist boats capsized and sank near Phuket during a sudden storm. Forty-six people perished and three were declared missing, all of whom were on the double-decker ship Phoenix PC Diving, which carried 101 people, including 89 tourists (all but 2 were Chinese nationals). All 42 passengers aboard the second boat, Serenita, were rescued. Chinese arrival numbers plummeted following the tragedy. 4  Business Sentiment Index, Bank of Thailand. 14 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 6: Exports slowed down across the region Percent Change in Merchandise Exports, SA US$ 30 20 Year-on-year growth 10 0 -10 -20 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Philippines Indonesia Malaysia Thailand Source: Haver Analytics. Fiscal policy development: expansionary compared to last fiscal year and largely missing stance the official target by 17.5 percent. To support the expansion of domestic demand and spur growth in Aligned with the continued economic expansion, a deteriorating external environment, increasing the government revenues exceeded the official target capital expenditure disbursement rate in the future for the fiscal 2018. Net government revenues were would be crucial to the Thai economy. estimated at 2,528 billion baht, an increase of 7.3 percent over the previous fiscal year and For the 2018 fiscal year, the budgetary balance 1.1 percent more than the official target rate. In was a deficit of 624.5 billion baht (3.7 percent particular, the rise in public revenues was fueled by of GDP), but the non-budgetary balance was a an uptake in revenue from the corporate income surplus of 233.8 billion baht (1.4 percent of GDP).5 tax and revenue from petroleum income tax, which Public debt stood at 6.8 trillion baht or 41.5 percent rose by 233.7 percent in the third quarter due to of GDP, which is far below the fiscal prudential relatively high prices of crude oil and production maximum limit of 60 percent of GDP. Total quantity. Tax revenues from VAT and those from public spending was set at 3,000 billion or 17.1 excise tax were also on an upswing. percent of GDP for the fiscal year 2019, a slight decrease compared the previous fiscal year. Public Public expenditure increased by 8.6 percent in investment on the other hand is expected the third quarter of 2018, compared to the same to accelerate in fiscal year 2019 to 6.2 percent, quarter last year. During the third quarter, current from 5 percent in fiscal year 2018. This expansion expenditures were up 5.6 percent and capital in public investment is in line with the expansionary expenditure disbursements was up 17.7 percent. For fiscal stance in recent years to support the large the 2018 fiscal year, which ended in September, public infrastructure projects underway to connect the disbursement rate for current expenditures lagging regions. Some of the public transportation stood at 96.1 percent, missing the official target projects include railway dual-tracking, Mass Rapid set at 98.4 percent. The disbursement rate for Transit lines (Orange, Pink and Yellow) in Bangkok, the capital expenditures, on the other hand, was a Bang Pa-in to Nakhon Ratchasima motorway and estimated at 70.5 percent, falling by 0.1 percent a train route from Bangkok to Nakhon Ratchasima. 5  on-budgetary balance includes revolving funds from specialized financialized institutions (policy banks) and non- N budgeted borrowing for emergencies such as the flood of 2011. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 15 Table 1: Selected Fiscal Data FY Revenue (% GDP) Expenditures (% GDP) Balance (% GDP) 2015 16.1% 18.7% -2.6% 2016 16.5% 19.1% -2.6% 2017 16.2% 18.7% -3.5% 2018 15.3% 18.3% -3.0% Source: Bureau of the Budget. Figure 7: Inflation has been kept at low and manageable levels 2,5 2.0 1.5 Inflation year-on-year 1.0 0.5 0 -0.5 -1.0 -1.5 2015 2016 2017 2018 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Core inflation Headline inflation Key policy Source: Bank of Thailand Figure 8: Rising energy prices in the global market impacted prices in transportation and communication 0.03 0.01 0.1 0.1 Food and non-alcoholic beverages Apparel and footware 0.3 Housing and furnishing 1.1% Medical and personal care Transportation and communication Recreation and education 0.03 Tobacco and alcoholic beverages 0.6 Source: Bank of Thailand. 16 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Monetary and Financial sector money supply (M3) growth, which expanded by development: maintaining an 5.2 percent in the first three quarters in 2018, effectively supporting the growth in the economy. accommodative stance High household debt poses a risk to highly Inflation remained low and near the lower bound leveraged households when interest rates begin of the inflation target range, creeping up slightly to normalize. The low and steady interest rate in 2018. Headline inflation has slowly risen, environment, past fiscal and quasi-fiscal policies averaging 1.1 percent in 2018 from 0.7 percent in to stimulate consumption through housing and 2017 (Figure 7). Rising energy prices in the global car tax rebates as well as the rice pledging market impacted the prices of transportation scheme6, competition in consumer credit and loose and communication which remained elevated macro-prudential stance in specialized financial throughout the year and contributed more than half institutions all contributed to higher leverage in of the inflation in 2018 (Figure 8). Food inflation, the household sector. From less than 60.0 percent meanwhile, remains subdued at 0.4 percent in in 2010, the household debt to GDP peaked at 2018, due to the absence of price growth in 81.2 percent in the fourth quarter of 2015 but has 2017. The marginal increase in food inflation was slowly fallen to 77.5 percent in the second quarter caused by the higher prices of rice, flour and cereal of 2018 (Figure 10). The deleveraging, however, products as the prices of meats, eggs and dairy has been uneven and concentrated in wealthier products, and vegetables and fruits contracted. households in certain regions (Figure 11). Given the Excluding the volatile food and energy items, core rise in the central bank policy rate for the first inflation remains largely stable reaching 0.7 percent time in three years and possible future hikes, the in 2018 from 0.6 percent in 2017. Both headline high level of household debt represents a build-up of and core inflation numbers fell near the lower potential vulnerabilities. The Bank of Thailand has bound of the central bank’s 1–4 percent headline recently announced the issuance of loan-to-value inflation target range. caps for high-end housing to pre-empt the build-up of risks, and previously tightened credit line limits With inflation at manageable levels, the Bank of for credit card and personal loans. Thailand maintained its accommodative monetary policy which supported credit expansion. The Nonetheless, Thailand’s financial system remains Bank of Thailand kept its key policy rate at stable with capital adequacy well above Basel 3 1.5 percent from April 2015 to December 2018, requirements. The share of non-performing loans which supported credit growth and in turn, to total loan portfolio in commercial banks stood domestic demand in 2018. In December 2018, at 2.94 percent in September 2018, marginally the Bank of Thailand raised its policy rate to lower than the 2.97 percent in September 2017. 1.75 percent to curb risks to financial stability from Regulatory capital risk-weighted assets ratio the extended low-interest rate environment. Bank stood at 17.6 percent in the second quarter of loans grew at an average of 5.5 percent in the first 2018, the same as in the second quarter of 2017, three quarters of 2018 from 3.1 percent in the which is double the 8 percent minimum capital same period in 2017. On the one hand, consumer adequacy ratio under Basel 3. The ratio of actual loans, which accounted for 33.4 percent of total to regulatory loan loss provision remained high at loans, saw an increase of 7.9 percent in the first 182.1 percent in the second quarter of 2018. Based three quarters of 2018, driven by the robust lending on the latest available data, the banking system’s for autos and housing loans. On the other hand, return on assets stood at 1.4 percent while the corporate loans, which accounted for 66.7 percent return on equity was at 9.9 percent. Despite a of total loans, grew at 4.3 percent in the first three decline in fee income due to growth in fee-free quarters of 2018 with the financial services, real retail fund transfers via internet and mobile estate activities, and wholesale and retail trade banking transactions, bank profitability increased sectors significantly contributing to the expansion by 15.9 percent in the second quarter of 2018 in credit. Total credit represented 105.2 percent of from a 4.1 percent contraction in the same period GDP in the first three quarters of the year (Figure 9). last year, due to higher interest income and lower The credit expansion went hand-in-hand with provisioning expenses. 6  or example, the Yingluck administration (2011) supported Thai rice farmers by buying rice at prices 50 percent above F market prices. The policy is estimated to have cost 3.5 percent of GDP (World Bank Thailand Economic Monitor December 2012). THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 17 Figure 9: Corporate and consumer loans grew faster in the first three quarters of 2018 9 114 8 112 7 Percentage of …………… 110 Percentage of …………… 6 5 108 4 106 3 104 2 102 1 0 100 Q1-Q3 2014 Q1-Q3 2015 Q1-Q3 2016 Q1-Q3 2017 Q1-Q3 2018 Credit to GDP ratio (RHS) Total loans growth Consumer loans growth Corporate loans growth Source: Bank of Thailand. Figure 10: Household debt as a share of GDP has slowly fallen since 2015 85 80 75 Percentage of …………… 70 65 60 55 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Source: Bank of Thailand. 18 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 11: Household debt classified by region/Index 2007 = 100 180 160 140 Unit 120 100 80 60 2007 2009 2011 2013 2015 2017H1 Bangkok Central region (excluding Bangkok) Northern region Northeastern region Southern region Source: National Statistical Office, Bank of Thailand. Figure 12: Household debt classified by income/Index 2007 = 100 180 160 Quintile 1 = Lowest-income household Quintile 5 = Highest-income household 140 Unit 120 100 80 60 2007 2009 2011 2013 2015 2017H1 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Source: National Statistical Office, Bank of Thailand. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 19 Figure 13: The Thai baht weakened starting the second quarter of the year 40 38 36 34 Unit 32 30 28 26 2013 2014 2015 2016 2017 2018 1 2 4 6 8 10 12 1 3 5 7 9 11 1 3 5 7 8 10 12 2 4 6 8 9 11 1 3 5 7 9 10 12 2 4 6 8 10 11 Source: Bank of Thailand Figure 14: The Thai Baht’s real effective exchange rate appreciated more than the regional peers’ 4 2 0 Unit -2 -4 -6 -8 China CNY Philippines PHP Thailand baht Indonesia IDR Malaysia MYR Change in REER Source: Bank of International Settlements 20 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Table 2: Balance of Payments (Q1-Q3 2013 – Q1-Q3 2018) In millions US$/in percentage of GDP Q1-Q3 2013 Q1-Q3 2014 Q1-Q3 2015 Q1-Q3 2016 Q1-Q3 2017 Q1-Q3 2018 Current account (8,428) (0.03) 6,822 0.02 20,868 0.07 37,485 0.12 37,852 0.11 25,936 0.07 Goods (2,069) (0.01) 11,403 0.04 19,073 0.06 29,445 0.10 27,128 0.08 15,863 0.04 Exports 171,082 0.54 169,427 0.56 161,354 0.53 159,461 0.52 174,137 0.52 188,189 0.50 Imports 173,152 0.55 158,024 0.52 142,281 0.47 130,016 0.43 147,009 0.44 172,326 0.46 Services 7,944 0.03 4,881 0.02 13,855 0.05 18,718 0.06 21,523 0.06 22,927 0.06 Primary income (22,349) (0.07) (16,205) (0.05) (17,159) (0.06) (15,529) (0.05) (16,379) (0.05) (18,834) (0.05) Secondary income 8,046 0.03 6,744 0.02 5,099 0.02 4,851 0.02 5,580 0.02 5,980 0.02 Capital and financial account 4,777 0.02 (8,097) (0.03) (9,396) (0.03) (8,849) (0.03) (7,120) (0.02) (10,730) (0.03) Capital account 270 0.00 91 0.00 0 0.00 – – – – (611) (0.00) Financial account 4,507 0.01 (8,188) (0.03) (9,396) (0.03) (8,849) (0.03) (7,120) (0.02) (10,120) (0.03) Direct investment 3,739 0.01 1,553 0.01 3,566 0.01 (10,398) (0.03) (4,455) (0.01) (2,579) (0.01) Portfolio investment (674) (0.00) (7,445) (0.02) (10,986) (0.04) 5,400 0.02 (110) (0.00) (3,733) (0.01) Financial Derivatives (80) (0.00) 238 0.00 743 0.00 3 0.00 132 0.00 19 0.00 Other investment 1,521 0.00 (2,534) (0.01) (2,718) (0.01) (3,855) (0.01) (2,687) (0.01) (3,826) (0.01) Net errors and omissions 1,862 0.01 244 0.00 (6,545) (0.02) (10,167) (0.03) (7,973) (0.02) (7,242) (0.02) Overall balance (1,789) (0.006) (1,031) (0.00) 4,928 0.02 18,468 0.06 22,759 0.07 7,964 0.02 Memo: Basic Balance (4,689) (0.01) 8,375 0.03 24,434 0.08 27,086 0.09 33,397 0.10 23,357 0.06 External sector development: heightened The current account remains in surplus but uncertainty and volatility declined due to a narrowing trade gap. The current account surplus declined from US$37.9 billion Despite heightened uncertainty in the external (0.11 percent of GDP) in the first three quarters of sector, the Thai baht appreciated in 2018. 2017 to US$25.9 billion (0.07 percent of GDP) in Heightened uncertainty and volatility in the external the same period in 2018 (Table 1). This was mainly environment, brought by the normalization of the driven by a narrowing trade surplus where goods US Federal Funds rate, US-China trade tension, imports expanded by 17.2 percent year-on-year in and contagion fear from the Turkey and Argentina the first three quarters of 2018, more than double economic troubles, have weakened most currencies the expansion of good exports at 8.1 percent. in the region. The Thai baht, however, appreciated Meanwhile, services exports, which draw mainly in nominal terms by 5.0 percent year-on-year from from tourism receipts, raked in US$22.9 billion an average of Thai baht/US$33.92 in 2017 to an (0.06 percent of GDP) in the first three quarter of average of Thai baht/US$32.32 in 2018 (Figure 13). 2018, higher than US$21.5 billion (0.06 percent of On a quarter-on-quarter basis, however, the weak GDP) in the same period in 2017 despite the decline external environment has already caught up to the in the number of tourists, so far, this year. Primary baht which depreciated by 1.3 percent in the second income accounts generated net dollar outflows of quarter and 3.1 percent in the third quarter of 2018. US$18.8 billion (0.05 percent of GDP) driven by The depreciation was likely brought about by a the repatriation of foreign investment incomes, combination of heightened import demand and net while secondary income accounts, represented capital outflows. In real terms, the Thai currency’s by personal remittances and other transfers, effective exchange rate has also appreciated, more generated net inflow of US$6.0 billion (0.02 percent than other regional currencies in the past twelve of GDP). months (Figure 14). THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 21 Figure 15: A smaller current account surplus, coupled with capital outflows, have narrowed the balance of payment surplus 0.15 0.10 Percent of GDP 0.05 0 -0.05 -0.10 Q1-Q3 2013 Q1-Q3 2014 Q1-Q3 2015 Q1-Q3 2016 Q1-Q3 2017 Q1-Q3 2018 Current account Capital and financial account Net errors and omissions Overall balance Source: Bank of Thailand. Figure 16: Among regional peers, the CDS spread is the lowest in Thailand 400 300 Basis points 200 100 0 2013 2014 2015 2016 2017 2018 Indonesia Malaysia Philippines Thailand Vietnam Source: Haver Analytics. Figure 17: Gross international reserves can cover three times the short-term external debt 220,000 200,000 Unit 180,000 160,000 140,000 2014 2015 2016 2017 2018 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 Source: Bank of Thailand. 22 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Net capital outflows, however, intensified in the first three quarters of 2018 driven by both net selling of foreign investors and a net outflow of Thai direct investment. The capital and financial account deficit widened to US$10.7 billion (0.03 The overall balance of payments remains in percent of GDP) in the first three quarters of 2018 surplus. Given the narrower current account surplus from US$7.1 billion (0.02 percent of GDP) in the and the intensified capital outflows, the balance of first three quarters of 2017. The uncertain external payments declined to US$8.0 billion (0.06 percent environment led to weaker investor sentiments of GDP) in the first three quarters of 2018 from in emerging economies, intensifying portfolio US$22.8 billion (0.07 percent of GDP) in the first outflows from Thailand in line with the experiences three quarters of 2017. Even so, international of regional peers. Nonetheless, after persistent reserves remain at high level, reaching US$201.8 outflows in the first half of the year, portfolio billion in end-October 2018 or more than three investment has started to return to Thailand in times the short-term external debt (Figure 17). the third quarter, where the CDS spread remain the lowest among East Asian peers (Figure 16). Direct investment abroad by Thai entities grew Poverty and Unemployment: long-run 10.7 percent year-on-year to reach US$12.0 billion poverty reduction has been positive in the first three quarters of 2018, contributing to the capital outflows. In contrast, foreign direct In line with the more broad-based economic investments to the country expanded 47.7 percent expansion observed in the first 3 quarters, a rise year-on-year, to reach US$9.4 billion in the first in agricultural and nonagricultural employment three quarters of 2018. pushed the unemployment rate to its lowest rate in eight quarters. This is a sign of an increasing broad-based economic recovery amidst a transition towards a domestic demand driven expansion. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 23 Poverty has been on the decline, with recognition Together, the North and Northeast regions account that some regions are lagging and that regional for almost half of the total population, and many differences exist. As an upper-middle income are still very reliant on agriculture. The increase country, Thailand accordingly boasts one of the in poverty rates in these two regions aligns with lowest levels of extreme poverty as measured by a sharp fall in agricultural production. By GRP per the International Poverty Line ($1.90/day 2011 capita, the North and Northeast have the lowest PPP). However, at the more stringent upper-middle values. While many in the North farm, it is not income class (UMIC) poverty line, ($5.5/day 2011 evident from examining their household income. PPP), Thailand’s poverty rate of 7.1 percent in This region is also reliant on remittances. In terms 2015 is similar to its wealthier neighbor, Malaysia. of population, the largest number of poor reside in Since the late 1980s, when the NESDB began the the Northeast. national poverty rates series, official poverty rates measured by the government of Thailand have Continued progress in lowering poverty will only increased four times. Three of these instances depend on productivity gains. Poverty is expected coincided with financial crises. However, poverty to decline at a slower rate in rural areas in the increased again in 2016, based on both official medium term, as agricultural prices are not estimates using the national poverty line as well as expected to reach highs observed in recent years using the international UMIC poverty line. The most due to the global commodity cycle. Growth could recent occurrence, in 2016, is difficult to explain. become less inclusive, with the rural poor negatively The most likely cause is the stagnation or fall in affected unless agricultural productivity increases. agricultural production in rural regions. In addition, rural households are aging rapidly as younger generations have migrated to urban areas. The UMIC poverty rate in 2017 remained higher than it was in 2015. Official estimates of poverty Poverty estimates based on the national poverty produced by the NESDB coincidentally trends line for 7,424 tambons are presented in a map very closely with the international $5.5/day UMIC view for easier visualization. The NSO map shows poverty line. Over the comparable7 survey periods large areas of high poverty in the Northeast of 2014-17, national poverty rates declined, with and Central regions that border Myanmar, other almost no changes from 2015–17. All regions northern borders along Laos, and other smaller but Bangkok experienced a rise in poverty from pockets of poverty. Bangkok, Phuket, and the 2015-17. Poverty in the Northern region increased proposed Eastern Economic Corridor areas with the most in absolute terms from 2015–17. In the the lowest poverty rates. Pattani, another pocket North region, poverty increased for two consecutive of high poverty, is located in the FCV South region. years, related to droughts that severely affected The map of the number of poor is also interesting agricultural production. A small-area view (tambon) since Bangkok, has one of the highest population of poverty shows clustering of poverty particularly of poor despite its low poverty rate, due to the high around border areas (see Box 1). population density. 7 I mportant note on comparability: A survey break between 2013 and 2014 prevents full exploration of the growth story. Starting in 2014, the survey samples were drawn from the 2010 Census. However, this caused a large shift in the urban and rural proportions. In 2013, 33 percent of the population was urban, compared to 43 percent in 2014. According to the WDI, the urban share of the population in 2013 and 2014 in Thailand was about 46 percent. Unfortunately, this means that trends cannot be made between the 2013 and later years of the SES. To illustrate this point, as a larger urban share is introduced into the survey, average incomes and consumption increased. The lack of a spatial deflator also contributes to this bias. 24 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Box 1 A Small Area View of Poverty Poverty estimates based on the national poverty line for 7,424 tambons are presented in a map view for easier visualization. The NSO map shows large areas of high poverty in the Northeast and Central regions that border Myanmar, other northern borders along Laos, and other smaller pockets of poverty. Bangkok, Phuket, and the proposed Eastern Economic Corridor are areas with the lowest poverty rates. Pattani, another pocket of high poverty, is located in the FCV South region. The map of the number of poor is also interesting since Bangkok, has one of the highest population of poor despite its low poverty rate. This is due to the high population density. Figure 18: Tambon-level small-area poverty estimates, and province-level number of poor, 2015 Notes: Small-area estimates calculated by NSO using Thailand official poverty lines. Bueng Kan is not included in the NSO small area poverty estimates since it was not approved as a province until 2011, after the 2010 Census. In the left panel, poverty rates are grouped, 25 refers to 25+. Source: Estimates by NSO, visualization by WBG staff. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 25 B. OUTLOOK FOR 2019–2020 headwinds, the recovery in emerging market and developing economies has lost momentum, with Growth in 2019-2020 is expected to be driven some countries experiencing significant financial by a strengthening domestic demand reflected market stress. Global growth is projected to weaken in more robust private consumption and capital to 2.9 percent in 2019 and 2.8 percent in 2020, formation (Table 2). The growth of exports and which will likely impact the export performance tourism receipts, however, is expected to slow down of Thailand and restrain manufacturing activities amidst weaker external demand and fewer tourist in export-oriented industries. Nonetheless, the arrivals, along with market turbulence in the global country’s growth momentum in capital formation environment. As heightened external uncertainty and public consumption may be sustained as remains elevated in the short term, global economic the government pursues its public infrastructure and financial volatilities will pose a challenge to the investment plans. Thai economy in the coming years. This growth projection assumes that the The World Bank projects a softening of Thai government will maintain its expansionary real GDP growth to 3.8 percent in 2019 and 3.9 fiscal stance and deliver on public infrastructure percent in 2020 (Figure 19).8 These projections development. Infrastructure spending in scheduled reflect a downward correction from the earlier- to accelerate in 2019 and pick up in 2020 as projected 3.9 percent growth in 2019 and 2020, EEC related projects are implemented. As exports reflected in the October 2018 edition of the WB continue to slowdown, private investment could be East Asia and Pacific Economic Update. This derailed as a result. Faster disbursement rate of growth estimate is a reflection of a weaker global the capital expenditure budget could then give a economic prospect given tightening financing much-needed boost to the Thai economy. The fiscal conditions, moderating industrial production, deficit is expected to be maintained at 3.0 percent and lingering trade tensions. Faced with these in 2019. Table 3: Selected Economic Indicators 2015 2016 2017 2018e 2019f 2020f Growth in real GDP 3.0 3.3 3.9 4.1 3.8 3.9 Private consumption 2.3 3.0 3.2 4.6 4.4 4.4 Government consumption 2.5 2.2 0.5 4.6 4.6 4.3 Gross fixed capital investment 4.3 2.8 0.9 5.4 5.5 5.6 Exports, goods and services 1.6 2.8 6.0 5.9 5.7 5.5 Imports, goods and services 0.0 -1.0 7.2 7.2 7.1 6.8 Consumer Price Index, average -0.9 0.2 0.7 1.2 1.4 1.6 Fiscal Balance, % of GDP -2.6 -2.6 -3.5 -3.0 -3.0 -3.0 Current account balance, % of GDP 8.0 11.7 11.0 7.6 6.0 4.5 Source: NESDB, BOT, and World Bank Estimates. 8 The Bank of Thailand’s Leading Economic Indicators shows a strong but plateauing growth in 2018 (Figure 19).  26 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 19: The Thai economy is projected to grow at 4.1 percent in 2018 8 6 Unit 4 2 0 2012 2013 2014 2015 2016 2017 2018e 2019f 2020f Actual GDP growth Growth forecast Source: NESDB, World Bank staff estimate. Figure 20: Leading economic indicator shows a plateauing in 2018 160 150 140 Unit 130 120 110 2012 2013 2014 2015 2016 2017 2018 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 Coincident economic index Leading economic index Source: Bank of Thailand. Figure 21: The private consumption index reflects a rising trajectory 160 140 120 Unit 100 80 60 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Source: Bank of Thailand. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 27 The monetary policy stance is expected to remain the agriculture sector where the farmer’s income accommodative to growth, but the central bank index has grown in 2018. The agriculture sector may need to keep an eye on inflationary pressure constitutes roughly a third of the employed in and a further rise in the US Fed Funds rate. The Thailand. Meanwhile, the low inflation, coupled with Bank of Thailand has maintained its key policy rate the low interest rate environment and the end of at 1.5 percent since April 2015, generally supportive the five-year ownership requirement under the of domestic credit and economic growth. During first-car buyer scheme, will likely fuel consumer this time, inflation has been judiciously kept at low spending. The private consumption index, prepared levels though it has steadily risen since 2016. Given by the Bank of Thailand, reveals a positive the strengthening domestic demand and planned trajectory, signifying a potential for sustained public spending on infrastructure, inflation pressure growth momentum (Figure 21). may start to build up, albeit from a low base. Headline inflation is projected to gradually rise from Public and private investment are expected to 1.2 percent in 2018 to 1.6 percent in 2020, but still accelerate as the government delivers on public falls in the lower end of the central bank’s inflation infrastructure development. The Thai government target range of 1 to 4 percent for the medium term. has embarked on an ambitious infrastructure Yet, another factor to watch out for is the further investment plan, meant to transform the country normalization of the U.S. Fed Funds rate, which was into a regional economic hub in trade, investment, raised eight times since 2015 to the current 2.25 tourism, communication, and transportation. The percent. A widening interest rate gap could impact cornerstone of this plan – the Eastern Economic the capital and foreign exchange markets, and Corridor (EEC) – is expected to deliver investment contribute to capital flows moving out of Thailand, in infrastructure projects of USD43.0 billion as they have in previous months. between 2018 and 2022 for airport expansion, port development, railway construction and modern Private consumption is anticipated to sustain industry growth.9 Spending on large infrastructure Thailand’s growth momentum on the back of projects is scheduled to accelerate in 2019 and improved employment and income conditions, peak in 2021 (Figure 22). The ramp up in public amid a low inflation environment. Employment and investment associated with the EEC is expected income conditions have generally improved in 2018. to attract private investment as the government The unemployment rate declined from an average leverages private-public partnership scheme for of 1.2 percent in the first three quarters of 2017 select projects. Moreover, the private sector will to 1.1 percent in the first three quarters of 2018 likely increase productive capacity through new with employment growth seen in both agriculture investments on machines and equipment to and non-agriculture sectors. Employment may address growing domestic demand and perhaps, grow further, contingent on the timely rollout new opportunities that may arise from the US- of the infrastructure investment plans that will China trade dispute. In general, business sentiment stimulate demand for construction workers. has been upbeat in the past two years, and While the unemployment rate has remained barring any sudden change in policy continuity, historically low due to the ability of the informal this optimism may spill into 2019 (Figure 23). services and agricultural sectors to absorb labor In addition, several industries (e.g. automobile, during downturns, employment income levels are petroleum, meat processing, plastics and synthetic expected to improve especially in the tourism rubber) show capacity utilizations above 80 percent sector in anticipation of its rebound in 2019, and and are more likely to expand their production capacities.10 9 Thailand Board of Investment: https://www.boi.go.th/upload/content/BOI%20-%20Thailand%20Infrastructure%20 Development_14976.pdf, December 8, 2018. 10  Jongwanich and Kohpaiboon (2008) offer a different explanation, arguing that private investment in Thailand has been sluggish due to the shortage of capital funds as measured by the level of credit extended to the private sector. Jongwanich, Juthathip and Kohpaiboon, Archanun, “Private Investment: Trends and Determinants in Thailand”, World Development, Vol. 36, No. 10, 2008. 28 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 22: The total value of mega- infrastructure investment projects peaks in 2021 700 618 637 600 554 in billions of Thai baht 500 400 381 383 300 210 200 100 83 81 3 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Krungsri Research, MOT, OTP. Figure 23: The Business Sentiment Index has been upbeat since 2017 60 55 50 Unit 45 40 35 30 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Source: Bank of Thailand. Note: Index above 50 indicates business sentiment has improved. Index below 50 indicates business sentiment has worsened. Exports are expected to continue to grow but at a infrastructure investment plan. The projected slower pace due to the weak external environment, faster import growth relative to export growth will while imports will accelerate to satisfy the effectively narrow the trade surplus. requirements of the infrastructure investment. The weak and uncertain external environment The tourism sector is anticipated to rebound will slow down the global demand for goods and in 2019 after a soft demand in 2018. The services, including that of Thailand. However, recent tourism sector in Thailand slowed in 2018 due World Bank studies show that there is opportunity to competition with the 2018 FIFA World Cup in for the country to capitalize on the external Russia, which caused European tourists to change weaknesses including the prevailing US-China trade their destination, while a boat accident in July in dispute (Box X3). The relocations of production Phuket lowered the influx of Chinese tourists. The activities and investments, or the diversion of U.S. Thai authorities have intensified efforts to ensure demand from China to Thailand may intensify in standards for tourist safety, and have added 2019–2020.11 If realized, this is an opportunity to advocates to target and re-engage the Chinese maintain or quicken the export growth despite clienteles. Based on historical data, episodes of the global demand slowdown. Imports, however, crisis incidents such as the 2008 airport closure, will likely increase in the coming years to satisfy the 2010 military crackdown, and the 2015 Erawan the requirements in capital, for both equipment Shrine bombing were generally followed by a and raw materials necessary to carry out the recovery of tourist arrivals in three or four months.12 11 The NESDB Economic Report in Q3 reveals that based on information from various sources, some entrepreneurs have started to plan for their production base relocation since the second quarter of 2018. 12 Krungsri Research, Economic Outlook 2019. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 29 C. EMERGING RISKS State Financial and Fiscal Discipline Act of 2018. External debt is also relatively low (32 percent of The continued slowdown in global trade remains GDP) and mostly denominated in baht or hedged. a risk to Thailand’s nascent domestic demand While the size of these buffers reflects Thailand’s recovery. The initial recovery of the Thai economy sluggish public investment and growth in recent in 2016–2017 was primarily driven by external years, there seems to also be a clear bias toward demand. However, the first nine months of 2018 stability in policy-making. showed an upswing in domestic consumption and investment, suggesting that the Thai economy transitioning from being exports driven to being D. POLICY WATCH domestic demand driven, supported by strong private consumption and a gradual rise in private The government has focused on economic reforms investment. Investment growth in 2018 so far has aimed at raising Thailand’s potential growth been driven by export-led industries facing high to achieve high income and inclusive growth as capacity utilization rates. Increased protectionism envisioned in the new 20-year national strategy. as well as slowing growth in Thailand’s key trading Initial steps taken are promising. Some highlights partners, may diminish export growth and slow from the ongoing reform efforts include: private investment recovery, thus curtailing domestic demand. Thailand enacted a new Budget Procedures Act 2018 in November 2018 to replace the former A second key risk is delayed private investment Budget Procedures Act 1959. The legislative recovery given concerns over political uncertainty. change is motivated by a desire to modernize Private investment sentiment notably improved the budgeting framework in line with plans for in 2018 but in general has been weak since 2012. performance-based budgeting, aligned with the Private investors remain concerned about political long term National Strategy, and to improve the uncertainty and the adverse impact on planned efficiency and cost effectiveness of spending. public infrastructure projects and policy continuity. The new act complements the recently enacted Continued progress on execution of mega-projects Fiscal Responsibility Act B.E. 2018. While this including those under the Eastern Economic new Act introduces monitoring, evaluation and Corridor and dual-tracking of railways will be reporting systems and limits off-budget borrowing critical to shoring up private investor confidence. to strengthen fiscal discipline, key challenges such as fiscal fragmentation and transparency Planned large public infrastructure projects may remain beyond the scope of the Act. Effective put a downward pressure on the already low coordination among such central planning disbursement rate of the capital budget and agencies as NESDB, OPDC, and BOB are required slow fiscal stimulus and private investment. for result-based management as well as the Disbursement rates for FY2017 and FY2018 performance-based budgeting of public projects. were both below 60 percent and given that In addition, the fundamental step of qualified planned infrastructure projects, such as high- project preparation and project feasibility need to speed rail, are large and complex, there is a risk be addressed comprehensively in other relevant of the disbursement decreasing or remaining low. laws and regulations to ensure the quality of public The new procurement law is likely to act as a infrastructure and public services (See Box 5: The bottleneck to project implementation, particularly New Budget Procedures Act). during the initial “teething” period as government agencies learn to abide by the new law. However, Eastern Economic Corridor (EEC). Parliament as government agencies adapt to the new law, the has passed the EEC Act in November 2018 which bottleneck may abate. is expected to boost investor confidence. The Act would build upon the success of the Eastern Thailand remains well placed to manage any Seaboard by empowering the EEC office with the potential volatility arising from cross-border ability to sidestep restrictions in investment and capital flows due to the large scale of its buffers. services. While the Eastern Seaboard focused on Thanks to a large current account surplus (8.1 hard infrastructure in the 1980s, the EEC will also percent of GDP), Thailand displays a very large focus on soft infrastructure to attract skills and basic balance surplus and the largest foreign targeted industries. Key measures in the Act which exchange buffer in the sub-region (74 percent of will encourage investment include (1) EEC areas GDP). Moreover, at 42 percent of GDP, public debt which primarily include Chachoengsao, Chonburi remains low. Fiscal discipline and fiscal rules are and Rayong provinces, and others; (2) creation of now enshrined in law under the recently passed regulatory bodies — Eastern Economic Corridor 30 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Policy Committee and the Eastern Economic utilization and promote fiscal decentralization Corridor Office — to drive the EEC projects and through increased local administration tax revenue. shorten the review and approval process; (3) tax Taxes on assets account for less than 5 percent incentives for business operators and foreign of tax revenue. The tax sets ceiling rates of workers in EEC; and (4) allowing foreign investors 0.2 percent of appraisal value for land used for to hold more than 50 percent stake in aviation agricultural purposes, 0.5 percent for residences, and related businesses. According to the Board 2 percent for commercial use and 5 percent for of Investment (BOI) report, applications for BOI vacant or undeveloped land. The tax will be levied privileges under EEC reached 388 projects in 2017 on first homes and land used for agricultural with a total investment value of 296.9 billion Thai purposes with appraisal prices starting at 50 baht (compared to 199.3 billion Thai baht in 2016). million baht, with the rate applied to the amount About 84 percent of 2017 application value was exceeding 50 million baht. Owners of first homes for 10 targeted industries. The government expects and farms with an appraisal price below 50 million that after the Act is enforced, the investment baht will be free from the tax liability. The tax value of applications for BOI privileges under EEC will also apply to second homes on a progressive would exceed its target of 300 billion Thai baht in basis, with rates of 0.03 percent to 0.30 percent 2018. Many projects, such as the high-speed rail for homes with an appraisal value of less than 5 from Suvarnabhumi airport to U-Tapao airport, million baht to more than 100 million baht. The high-speed trains connecting Suvarnabhumi and tax also financially penalizes landowners who leave U-Tapao are already in procurement stage and have land sites undeveloped. For vacant or undeveloped garnered private interest. land, the tax rate will be imposed at 1 percent for land left vacant or unused for 1–3 years, 2 percent Water management. Parliament passed a water for 4–6 years and 3 percent for more than seven resources law in October 2018 to integrate water years. Earlier versions of the tax drafted under management to address floods, droughts, and both the current and previous governments faced water shortages which negatively impact both the substantial opposition from landowners and the agricultural and manufacturing sectors. In 2016, tax was subsequently watered down. As such, only Thailand was hit by its worst drought in more 10 percent of homeowners who own more than than two decades. In addition, Thailand ranks 60 one house or own houses valued above 50 million out of 62 countries surveyed in the World Bank baht will be taxed. The bill came into effect in 2017. Enabling the Business of Agriculture indicators on Authorities are also setting up capacity for land water management. This indicates weaknesses on valuation. An estimated 200 billion baht will be the legal and regulatory framework for Integrated collected. The law is effectively immediately upon Water Resources Management (IWRM). Unlike publication in the Royal Gazette, but actual tax many countries, Thailand did not have a single collection will commence in 2020. law governing IWRM and the regulatory authority for water management is fragmented. In 2017, Going forward, the sustained pace and quality of authorities have made some progress in addressing reforms as well as sound implementation will be institutional fragmentation by relocating the Water crucial for translating the reform effort into the Resource Department from the Natural Resources desired economic outcomes. The government’s and Environment Ministry to the Office of the 20-year strategic plan is envisaged to help ensure Prime Minister to integrate nation-wide water administrative consistency and coordination management policy by overseeing all water-related across agencies as well as continuity across agencies. governments. Continued reforms in additional areas such as public investment management for The lands and building tax. The revised Lands complex projects, inclusive education, competition and Building tax, recently passed by parliament enforcement and services liberalization, will be in November 2018, will allow the government to particularly important to take Thailand from raise taxes progressively, expand asset-based tax middle- to high-income status. revenue, alleviate wealth inequality, raise land THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 31 Box 2 Thailand’s Budget for Fiscal Year 2019 The Thai National Legislative Assembly approved the budget proposal for fiscal year 2019 in June 2018. The FY 2019 budget was set at 3,000,000 million baht, representing a 1.6 percent decline from the FY 2018 budget and equal to 17.1 percent of GDP. The Budget Bureau of Thailand is responsible for the drafting and publishing of the budget. In line with the NESDB, the Budget Bureau assumed an economic expansion between 4.2 and 4.7 percent for 2018, which has since been updated to 4.2 percent, compared to the estimated 4.1 percent in the Thailand Economic Monitor. While exports are expected to remain sluggish in 2019, private consumption and investment are expected to continue an upward trajectory and support an annual growth rate of about 3.9 percent. Inflation is expected to remain low and between 0.9 and 1.9. Government net revenues are estimated at 2,550,000 million baht or 14.5 percent of GDP and borrowing at 450 000 million baht or 2.6 percent of GDP. Tax revenues constitute the bulk, 93 percent, of the government revenues of which indirect taxes (general and specific sales taxes) contribute the most. The largest sources of tax revenues include (i) corporate income tax (ii) VAT (iii) consumption tax. Borrowings for the FY2019 represent 15 percent of the total budget. Current expenditures account for most of the budget at 73.3 percent, and capital expenditures account for 22.2 percent. Social Services, which include environmental protection, education and social protection, account for the 42.7 percent of the budget in FY2019, compared to 43.3 percent in YF2018. Expenditure on Social Strategy has increased significantly since FY2017. Actual capital expenditures have been lagging the appropriated capital budget. The disbursement rates of the capital budget were below 60 percent for FY2017 and FY 2018, and with many large infrastructures planned for the next couple years there is a risk of an even lower disbursement rate. Subsidies to SOE account for 3.8 percent of the budget allocation, a decline of 5.2 percent over FY2018. The Thai government continue to maintain an adequate fiscal space.13 The annual deficit stood at 3.5 percent of GDP in FY2017 and as of 2018Q3, public debt was estimated to be 41.5 percent of GDP, which is well below the fiscal prudence limit of 60 percent of GDP. External debt stands at about 1.1 percent of GDP or 5.7 percent of the budget for FY2018. Budget allocation for environmental protection was set at 13163 million baht or 0.5 percent of total, a 53.6 percent increase over the FY2018. While budget allocation for pollution abatement saw no significant change, the category “Environment protection not elsewhere classified” increased by 88 percent. In summary the Thai government has ample fiscal space supported by low public debt at 41.5 percent of GDP, low foreign borrowing, relatively strong economic performance and stable macroeconomy. The government can use the fiscal space to spur domestic investment, which it plans to do in the next couple years with infrastructure spending expected to pick around 2021. Nonetheless, fiscal fragmentation remains an obstacle to public investment implementation.14 13 “Assessing Fiscal Space: An Update and Stocktaking” IMF Policy Paper.  14  ee Box. “Are Thailand’s Fiscal Institutions Fit for Thailand 4.0?” WB Thailand Economic Monitor: Beyond the S Innovation Paradox April 2018. 32 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Annual deficit recently increased from 2.6 percent of GDP in 2015 to about 3.5 percent in 2017. It was estimated at 3 percent in 2018 and is expected to remain at 3 percent in 2019. Annual deficit Percentage change in deficit 25% 40.0% 19% 19% 20% 18% 18% 30.0% Percentage of GDP 16% 16% 16.5% 15% Percentage change 15% 20.0% 10% 10.0% 5% 0.0% 0% -10.0% -2.2% -1.7% -5% -2.5% -3.7% -20.0% -30.0% 2014 2015 2016 2017 2015 2016 2017 2018 Revenue Expenditure Balance Tax revenue constitute the main source of government revenue. Recent rise in annual borrowing was fueled by the recent upswing in annual deficit, which is projected to remain stable in the medium run. Government revenues Percentage change in domestic borrowing 4,000,000 60% million Thai baht 3,000,000 40% Percentage change 2,000,000 20% 1,000,000 0% 0 -20% -40% 2016 2017 2018 2019 Tax revenue Non-tax revenue 2015 2016 2017 2018 2019 A couple of priorities in the budget include (i) infrastructure spending, which is expected to accelerate and pick in 2021 despite recent low disbursement rate and (ii) spending on social protection. Value of infrastructure projects Capital expenditure Spending on social protection disbursement rate 700,000 68% 400,000 600,000 66% 350,000 64% 300,000 500,000 62% 250,000 400,000 60% 200,000 300,000 58% 150,000 200,000 56% 100,000 100,000 54% 50,000 0 52% 0 2019 2020 2021 2022 2023 2016 2017 2018 2016 2017 2018 2019 Source: Bureau of the Budget THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 33 Box 3 The United States-China Trade War: How will Thailand Fare?15 The evolving US-China trade war heightens fear of global trade and investment disruptions which can result to slower global growth. In 2018, the United States has increased the level of import protection against China, slapping tariffs on about US$234.8 billion worth of Chinese products in three separate tranches (Table 4). To retaliate, China imposed its own tariffs on US goods worth about US$110 billion. Hinting of no end yet in sight, the US further released a list of proposed export controls on emerging technologies and up the rhetoric in the concluded Asia Pacific Economic Cooperation meeting in November. This trade dispute threatens the world economy by increasing the costs of inputs and final products, dampening investors’ sentiment, and disrupting trade. Recent World Bank simulation shows that the US-China trade war could reduce global exports by up to 3.0 percent and global income by up to 1.7 percent with losses across all regions.16 Many countries in the East Asia and Pacific region are exposed to the trade war, with Thailand included, given their integration into the global economy via trade and investment linkages. Thailand can potentially be impacted through the three channels: financial market uncertainty, direct investment, and direct and indirect trade channels. The trade war heightens uncertainty in the financial markets and weakened investors’ sentiments towards emerging markets such as the Thai economy. Although the recent financial market volatility and capital outflows in emerging economies were initially driven by tighter monetary policy in the US, the threat of a trade war has contributed to heightened uncertainty. This uncertainty has recently contributed to foreign capital outflows from the Thai economy, where net portfolio investment outflows widened by 2.8 percent in the first half of 2018 from a smaller 1.2 percent outflow in the first half of 2017. A result of investors flying to ‘safe havens’, this divestment of assets also contributed to the weakening of the Thai baht, which depreciated by 1.3 percent quarter-on-quarter in the second quarter of 2018 and 3.1 percent quarter-on-quarter in the third quarter (Figure 24). Table 4: Value of US imports from China targeted by the tariff measures Value of target imports Value of target imports in first announcement (in US$ billion) at effective date (in US$ billion) 1st tranche 32.3 (April 3rd) 32.3 (July 6th) 2nd tranche 13.8 (April 3rd) 13.7 (August 23rd) 3rd tranche 197.2 (July 10th) 188.9 (September 24th) Total 234.8 Source: WB staff estimates. 15  he content of this box has largely been drawn from “Potential Impact of the Trade Wars on East Asia and the Pacific,” T a note prepared by M. Cali et al., under the guidance of N. Diop. 16  “China-US Trade War Scenarios: Impacts on Global Trade and Income”, a note prepared by C. Freund, et al. 34 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 24: On a quarter-on-quarter basis, the Thai baht depreciated in the second and third quarters 115 110 Malaysia 105 Thailand 100 Philippines 95 Indonesia 90 85 2017 2018 Sep Dec Mar Jun Sep Source: CEIC, WB staff calculations. *Downward movement in currency represents depreciation. Figure 25: Thailand holds a high degree of similarities of exports basket to the US with China for affected products 0.6 0.5 0.4 0.3 0.2 0.1 0.0 an nd a m es a e a a ar ei ne a or G apu si re di si un na nm in la w ne ay bo ap Ko a pp Br i ai et Ta P do al ya m ng Th h i li Vi ui M Ca In ut M Si Ph So w Ne Source: WB staff estimates on the basis of US Bureau of Census Statistics. Thailand is well-positioned to host direct investments aiming to bypass tariffs in the US market in the medium term. By raising the cost of serving the US market from China, the trade war could lead to diversion of investments towards Chinese competitors in the medium term. The extent to which investments may relocate towards other countries would partly depend on each country’s ability to produce the same affected products. Thailand, Malaysia and Vietnam are best positioned to host these investments among Southeast Asian neighbors as they hold a high degree of similarities of exports basket to the US with China for affected products (Figure 25). Meanwhile, if the relocation of investments is driven by Chinese investors, countries which are already large recipients of Chinese outward FDI would be in a better position to capture such flows. Malaysia and Vietnam were the largest recipients of Chinese FDI in 2017 followed by Indonesia, Thailand and the Philippines. There is opportunity for Thailand to replace Chinese exports to the US, but this opportunity is lower compared with regional peers. US imports from China in the products subject to the three tranches of tariff measures are estimated to decline by US$68.6 billion; the bulk, of which, are related to electronic equipment and machinery and their components. This reduction has the effect of potentially diverting US imports to non-Chinese suppliers, for which, the similarity of exports baskets between these countries and China are high. Estimates show that the replacement potential of exports from Thailand, in terms of domestic value-added, is relatively lower compared with its regional peers (Figure 26). The potential domestic value-added of exports in Thailand is estimated at 2.5 percent of GDP and potential gross exports at 5.9 percent of GDP. This is in comparison with Vietnam, which is the country with the largest opportunity to replace Chinese exports in Southeast Asia, at 4.4 percent and 10.9 percent, respectively. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 35 Figure 26: Potential replacement of Chinese exports to the US by Thailand is lower than other peers 4.5% Potential DVA in X (%GDP) 12% 4.0% Potential gross X (%GDP) (right axis) 10% 3.5% 3.0% 8% 2.5% 6% 2.0% 1.5% 4% 1.0% 2% 0.5% 0.0% 0% m es a an e a nd a a ar or di si re si na nm in la iw ne ay bo ap Ko pp ai et Ta do al ya m ng Th h i li Vi M Ca In ut M Si Ph So Source: WB estimates. Figure 27: EAP countries including Thailand will be affected by the reduced Chinese demand for intermediates 0.25% Computer, Electronic and optical eqpt Electrical machinery and apparatus, nec Machinery and equipment, nec 0.20% Chemicals and chemical products Rubber and plastics products 0.15% Textiles, textile products, Leather and Others 0.10% 0.05% 0.00% an a ei e a nd es m a a or si re si di un na in la iw ne ay bo ap Ko pp Br ai et Ta do al m ng Th h i li Vi M Ca In ut Si Ph So Source: WB estimates. As Thailand is connected to the regional value chain, its exports to China will be negatively impacted by the reduced Chinese demand for intermediates. Concentrated in capital equipment and electronics goods, the drop in Chinese exports to the US could slightly reduce the demand for intermediates in EAP countries. Many countries in Southeast Asia are integrated in the China-led value chains. Among them, Malaysia is the most vulnerable country to the drop in Chinese demand for intermediates, which is expected to lose around 0.2 percent of GDP. While Thailand is also vulnerable, the impact is much lower at roughly 0.1 percent of GDP.17 Finally, another key indirect effect of the trade dispute operates through the changes in economic growth in both China and the US. Lower economic growth will translate to lower domestic demand which would generally reduce the demand for imports in those countries. 17  hile these negative effects are smaller than the estimated positive export replacement potential, the two figures are W not necessarily comparable. The latter are upper bound estimates of the potential for replacement. The true dimension of the replacement effect is likely to be considerably smaller than what was reported in Figure 27 for two reasons. First, each country would compete for the same potential market; and second, any such replacement would hinge on the supply response in each country-product pair; which could be relatively small in many cases. 36 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Box 4 The New Budget Procedures Act and its Implications Thailand enacted a new Budget Procedures Act B.E. 2561 (2018) in November 2018 to replace the former Budget Procedures Act B.E. 2502 (1959). The legislative change is motivated by a desire to modernize the budgeting framework in line with plans for performance based budgeting, aligned with the long term National Strategy, and to improve the efficiency and cost effectiveness of spending. The new act is complementary to the recently enacted Fiscal Responsibility Act B.E. 2561 (2018). The new act proposes changes in six major areas that could significantly improve budget execution and cement fiscal discipline. This includes: (i) Revision of the list and scope of the government budget receiving units. Local administration organizations are now designated as a separate budget unit, possibly allowing for increased decentralization, and the number of state owned enterprises eligible for government budget has been reduced. (ii) Adoption of more stringent rules to ensure fiscal responsibility. This includes directly linking controls of budgetary aggregates with the Fiscal Responsibility Act and including additional procedures for control of off-budget spending. (iii) Introduction of new expenditure budget items and allowance for in-year transfer of expenditure across departments. Three new expenditure categories have been introduced – central expenditure budget, particularly for emergency and unanticipated spending; central budget for consolidation, for spending that cuts across multiple budget units, which may facilitate inter-agency cooperation; and expenditure budget for personnel. The law also allows for transfer of personnel and consolidation funds across departments in-year without need for re-issuance in a budget bill – which could aid budget execution by reducing delays. (iv) Revision of budget practices and procedures. This includes more flexibility in approvals of requests for supplementary budget, with allowance for the Cabinet to propose supplementary bills along with the reasons and the source of funds to be received for the additional spending. New procedures have tightened the process of rollover of unused funds, limiting roll-over to a single six-month extension with Ministry of Finance approval, from the current practice of allowing multiple extensions on a case-by-case basis. (v) Introduction of Monitoring, Evaluation and Reporting Systems. This includes additional requirements of public disclosure on expenditure performance metrics and additional reporting on transfer of central expenditure budget between line items, expenditure budget for consolidation, and the expenditure budget for personnel. (vi) Introduction of commitment budgets. Previous budget procedures were binding on an annual basis, with funds committed annually and additional funds for multi-year capital projects needing to be approved each year. Section 18 of the new budget procedures act allows for multi-year commitments to be made in certain cases, with total funds for multi-year projects to be committed at project commencement. These multi-year commitments are still subject to the conditions that carry-over of spending across fiscal years is well specified and the preparation of such budget shall comply with the rules and procedures as specified by the Budget Bureau Director with the consent of the Cabinet. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 37 These changes could positively impact the implementation of complex, high-value and multi-year capital investment projects such as under the Eastern Economic Corridor (EEC). Public investment project implementation delays have been a major challenge facing Thailand, as highlighted in the fiscal section and in previous editions of the Thailand Economic Monitor. Improving project execution is critical in the context of implementing projects under the EEC (Figure 28), which estimates suggest require implementation of public and private investment of at least 1.5 trillion baht in the first five years. Provisions under the new budget procedures, such as increased flexibility of transfer of funds across departments and more adaptive and flexible budget procedures could improve capital budget execution. In addition, allowance of commitments for capital projects will provide an assurance that a specified amount will be available over several years, increasing the confidence of the private sector to commit to large-scale investments under a partnership framework. The positive impact of the procedural changes relies on effective and timely implementation. As highlighted in the previous Thailand Economic Monitor, fiscal fragmentation is a significant challenge for Thailand with fragmented legislative frameworks also playing a role. Implementing the new budget procedures act and the new fiscal responsibility act offers some opportunity to link the two legislations and to ensure, for example, that overlapping processes are streamlined. Doing so could significantly enhance the changes made under the new procedures. Essentially, the new Budget Procedures Act has envisaged several implications to the public financing of Thailand. Nonetheless, such critical issues like the institutional coordination and integration of all budget units toward the same integrated outcome as well as the qualified public investment management and appraisal to address transparency of public agencies are still required for further enhancement. While this new Act has introduced the monitoring, evaluation and reporting systems, the effective coordination among such central planning agencies as NESDB, OPDC, and BOB still required ensuring the result-based management as well as the performance-based budgeting of the public projects. Beyond this, such fundamental step of qualified project preparation and project feasibility need to be addressed comprehensively in other relevant laws and regulations to ensure the quality of public infrastructure and public services. Figure 28: Estimated Public and Private Investment Needs for the Eastern Economic Corridor New cities/hospitals 400 billion baht U-tapao airport Tourism 200 billion baht 200 billion baht Map Ta Phut port Industry 10.2 billion baht 500 billion baht Laem Chabang port Motorway 8.8 billion baht 35.3 billion baht High-speed train Double-track railway 168 billion baht 64.3 billion baht Source: EEC Office. 38 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 39 40 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL PART 2 EQUITABLE INVESTMENT IN HUMAN CAPITAL IS VITAL TO THAILAND’S CONTINUED ECONOMIC DEVELOPMENT POVERTY AND INEQUALITY REDUCTION HAS STALLED Following long-term improvements in both poverty and inequality indicators, Thailand’s progress on poverty and inequality reduction has recently plateaued. Over the last four decades, Thailand has made substantial gains on key social and economic development objectives, reflecting its remarkable transition from a low-income to an upper-middle-income country in a single generation. However, in the last several years household income and consumption growth have stalled nationwide, with a troubling decline observed among households at the bottom of the income distribution. Though Thailand’s inequality indicators are not grossly higher compared to peers, the size of top incomes and public perceptions of both inequality and economic mobility are a cause for concern. Thailand’s income- and consumption-based Gini coefficients are broadly consistent with its level of per capita GDP (Figure 29), though alternative measures of inequality taking into account top income earners suggest that the Gini coefficient may be underestimated. In the 2014 Pew Global Surveys, 90 percent of respondents reported that the income gap between the rich and the poor was either a moderate or very large problem. Moreover, a 2018 Gallup poll found that just 39 percent of Thai respondents believed that their standard of living was improving, the lowest share among all East Asian countries surveyed during the period (Figure 30). THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 41 Figure 29: Measures of Inequality, Thailand and Global Comparators, 2015 Income-based Gini coefficent Consumption-based Gini coefficient 0.6 0.6 0.5 0.5 Thailand Philippines Philippines Gini coefficient Gini coefficient 0.4 0.4 Thailand Malaysia Myanmar Mongolia 0.3 0.3 0.2 0.2 0.1 0.1 0 0 7 8 9 10 11 12 6.5 7 7.5 8 8.5 9 9.5 10 ln (GDP per capita, 2015) ln (GDP per capita, 2015) Source: World Bank staff calculations, PovcalNet. Note: Countries shown are those for which 2015 data are available. Countries with income-based household survey data tend to be richer than those with consumption-based survey data, and survey frequencies tend to be lower among the latter. Income-based Gini coefficients typically exceeds consumption-based coefficients, as income levels typically exhibit larger variations and may include negative values. Figure 30: Share of survey respondents who report that their standard of living is improving 90 80 70 Percentage of respondents 60 50 40 30 20 10 0 2016 2017 2018 Vietnam Lao PDR Thailand Cambodia Malaysia Mongolia Myanmar Philippines Indonesia China Source: Gallup polls. 42 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Box 5 Measures of Inequality in Thailand The Gini Coefficient Measures of inequality that focus on top income earners indicate that inequality may be higher than the Gini coefficient would suggest. Household survey data may be compromised by the underrepresentation of wealthy households, and analyses based on a combination of household, financial, and tax data often yield much higher income estimates among the top quintiles. Some researchers have found that including tax data more accurately captures wealthy households, and in Thailand the inclusion of tax data does yield higher Gini coefficients.18 Similar methodological issues affect other measures of inequality. For example, as part of Thailand’s national 20-year plan, the government aims to lower the ratio of income between the top and bottom 10 percent of the population to 15, while also boosting average income per capita. However, the survey data likely underestimate the average income of households in the top quintile. According to the household surveys, the top 1 percent of households accounted for 3.0 percent of consumption and 6.8 percent of income in 2017. By contrast, the World Inequality Report, which uses multiple data sources, found that households in the top percentile accounted for 20.2 percent of pre-tax national income.19 Figure 31: Share of consumption/ income held by the top 1 percent, by data type and source 25% 20% 15% 10% 5% 0% 2017 2016 Household per capita Household per capita Pre-tax national consumption income income Socio-Economic Survey World Inequality Report Vanitcharearnthum, 2017; Jenmana, 2018. 18 Due to the challenges involved in obtaining accurate tax records, the World Inequality Report covers a smaller and 19 wealthier group of countries than do analyses based on household surveys. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 43 Perceptions of Inequality Public perceptions of inequality can be just as important than objective measures. Public perceptions of inequality are based on subjective comparisons not only of income levels, but also of living standards, access to public services, and political influence. The widespread perception that economic returns are unfairly distributed, or that upward mobility is limited, can strain the social fabric. Moreover, public perceptions of inequality can have deeply negative consequences even when observed levels of inequality are relatively low. The regional Gini coefficient in Asia is lower than in other developing regions, such as Latin America, yet large shares of respondents in many Asian countries perceive their societies as highly unequal.20 Public perceptions of inequality are also influenced by social norms and cultural attitudes, which can shift rapidly and in ways that do not necessarily align with objective trends. For example, perceptions of inequality can worsen during times of robust growth, a phenomenon dubbed the “unhappy growth paradox.”21 Studies have found that perceptions of inequality contributed to the Arab Spring despite observed declines in inequality indicators.22 In Indonesia, inequality’s recent rise to prominence in the public discourse has bolstered support for policies designed to expand opportunity and reduce socioeconomic disparities.23 Given the importance of public perceptions, subjective measures of inequality can complement objective indicators. 20 World Bank, 2018a. 21 Graham and Lora, 2009. 22 World Bank, 2016c; Chattopadhyay and Graham, 2015. 23 World Bank, 2015. 44 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Uneven regional growth rates contribute to both The relatively low quality of education in rural the perception and the reality of inequality. From Thailand is an especially significant contributor 2011 to 2013, household per capita income in the to regional inequality. Education quality and Bangkok area grew at a rate of 10 percent per outcomes vary in Thailand both by region and year, far above the national average of 3.8 percent. household income level. Students from rural areas Meanwhile, growth in central Thailand as a whole and poorer households tend to receive the lowest- significantly outpaced growth in the country’s quality education and experience the worst learning north, northeast, and south regions. Between 2015 outcomes. For example, lower school quality likely and 2017, growth slowed nationwide, yet patterns contributes to lower levels of functional literacy of regional inequality persisted. in rural areas. Moreover, the results of the 2015 Program for International Student Assessment Addressing inequality at both the regional and (PISA) survey of school principals suggest that household levels is a central pillar of Thailand’s small village schools serving disadvantaged national strategy for inclusive growth. Relatively children25 lack adequate educational materials and unequal societies require faster economic growth infrastructure. rates to reduce poverty.24 The Government of Thailand has recently established a special Households in the bottom 40 percent of the inequality watchdog unit under the National income distribution are predominantly rural and Economics and Social Development Board to tend to have limited educational opportunities. help devise and implement strategies to reduce More than half of the rural population is in the social and economic disparities. In addition, the bottom 40 percent of the income distribution, legislature is expected to pass a set of bills in early compared to just one-quarter of the urban 2019 aimed at accelerating rural development by population.26 Rural households in the bottom 40 expanding rural communities’ access to economic percent have especially high illiteracy rates, and opportunities and resources. children from these households are likely to be enrolled in small village schools that have a limited capacity to provide essential education services. INEQUALITY AMONG CHILDREN CAN The pervasiveness of functionally illiteracy among HAVE A LIFELONG IMPACT 15-year-old students in rural villages underscores the urgent need to reduce educational disparities The inequality experienced by children contributes and enhance the quality of rural schools. to lifelong disparities in social and economic outcomes. Disparities in access to nutritional, The international evidence underscores the medical, educational, and social resources can importance of reducing neighborhood-level permanently impact children’s future economic income segregation. In economies with lower productivity. In addition to preventing children from levels of income segregation, children from reaching their full potential, high levels of inequality disadvantaged backgrounds are better able to and limited access to social and economic share the public services used by children from opportunities can exacerbate social tensions, wealthier backgrounds, and the social integration contribute to the misallocation of human capital, of households at diverse income levels generates a and inhibit economic growth. range of positive spillovers. Worldwide, economies with lower levels of educational segregation are also more likely to achieve higher aggregate levels of educational attainment, more equitable educational outcomes, and a greater degree of economic mobility. 24 World Bank, 2016c. 25 The survey classifies advantaged (disadvantaged) schools as those with a student body that ranks in the top (bottom) 25 percent on the economic, social, and cultural status (ESCS) index. The PISA ESCS index has three dimensions: the occupational status of parents, the education level of parents, and a measure of household assets that encompasses family wealth, cultural possessions, and books and other educational resources. 26 World Bank, 2018e. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 45 EQUALIZING OPPORTUNITIES FOR THE HUMAN CAPITAL INDEX MEASURES HUMAN CAPITAL DEVELOPMENT CAN THE EXPECTED PRODUCTIVITY OF THE HELP REDUCE SOCIAL AND ECONOMIC NEXT GENERATION DISPARITIES Human capital—an aggregate of the knowledge, Investing in human capital is critical to equalize skills, and health factors that largely determine opportunities across generations, which can boost labor productivity—has been a key driver of the growth and reduce inequality. Ensuring a level sustained economic growth and poverty reduction economic playing field requires that all households observed across East Asia over the past several have access to the resources necessary to build decades. Rapid technological change has tightened human capital. The World Bank’s Human Capital the link between human capital and economic Index (HCI) measures the actual and potential output at the national level. Automation continues productivity levels for the next generation of to eliminate many labor-intensive jobs, and the workers. Thailand’s score on the 2018 HCI was 0.60 new jobs it creates frequently require advanced out of 1, indicating that a Thai child born today will technical knowledge or sophisticated cognitive grow up to become only 60 percent as productive skills. As technology advances and spreads across as he or she could have been, had they received the borders, the global economy increasingly places optimal investment in health and education.27 While a premium on complex problem-solving, Thailand generally performs well on the various HCI socio-behavioral skills, reasoning, and self-efficacy.30 indicators compared to its peers in the Association Consequently, policies that accelerate human of Southeast Asian Nations (ASEAN) and other capital formation are vital to build the knowledge, upper-middle-income countries (UMICs) worldwide, competencies, and skills necessary to sustain it has substantial scope for further improvement. robust and inclusive growth in the context of a For example, Thailand’s survival rate for adults rapidly evolving global economy. between the ages of 15 and 60 is in the bottom half of all countries included in the HCI. Education and health play vital and complementary roles in the development of As Thailand’s economy continues to develop, human capital. Among high-income countries, innovation and productivity will become levels of educational attainment are closely linked increasingly important drivers of growth. Investing to economic performance. Similarly, strong health in human capital can enable Thailand to exploit indicators are essential to support economic emerging opportunities while maintaining its growth and productivity. At the individual level, competitiveness in a dynamic global marketplace. education and health factors play a major role in The rise of skill-intensive industries and sectors determining social and economic outcomes. These is already disrupting the labor-intensive growth effects are also transmitted across generations, as model of past decades. Moreover, meeting the well-educated individuals, especially women, demands of the country’s rapidly aging population are often better able to ensure the health and will require effective and equitable investment in education of their families. Positive maternal the next generation. Multiple demographic trends and early childhood nutrition are correlated with highlight the importance of broad-based investment improved educational outcomes and higher levels in human capital, including declining fertility rates, of cognitive performance. Similarly, high-quality rising life expectancies, and a shrinking working- education can break intergenerational cycles age population. By 2040, the share of the elderly of poverty, promote human capital formation, in Thailand’s total population is expected to be and support poverty reduction, with positive the highest in East Asia, and a highly productive implications for labor productivity, economic workforce will be critical to manage the country’s growth, and average life expectancy. Educated rising dependency ratio.28 The international populations also tend to have higher levels of social experience suggests that reducing inequality can tolerance, intercommunity trust, and demand for help accelerate economic growth.29 public services. 27 World Bank, 2019. 28 World Bank, 2016a. 29 Ferreira et al. 2013; World Bank 2006, 2016c. 30 World Bank, 2019. 46 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Box 6 The Contribution of Education to East Asia’s Extraordinary Growth Education has played a pivotal role in the remarkable economic growth and development achieved by countries across East Asia and the Pacific over the past several decades.31 In the early stages of the region’s economic transformation, education complemented labor needs, as widespread basic literacy and numeracy helped workers meet employer demand in the manufacturing and product-assembly sectors. As economic growth accelerated, educational mobility—i.e., the average increase in education levels between generations—rose rapidly, facilitating the development of knowledge- and skill-intensive activities. Across the region, investments in education have also proven critical to manage inequality and promote economic inclusion. Efforts to improve the quality of regional school systems have been complemented by increasingly sophisticated forms of technical and vocational education and training designed to ensure that workers have the skills necessary to exploit emerging opportunities and meet future economic challenges. Japan, China, Korea, Singapore, and other regional economic leaders situated their educational policy goals within a larger policy framework that sought to close technology gaps with the world’s most advanced countries and build the domestic capacity to produce innovative knowledge and technological advancements that would enable them to compete on the global stage. Long-term gains in productivity require continuous efficiency improvements and the application of new technologies, creating a steady demand for more highly skilled workers. However, investments in education yielded gains for workers at all education and income levels, not just those employed in high-tech sectors and industries. In rural areas, workers with even a few years of primary school consistently outproduced their less-educated counterparts. Poverty rates dropped across the region as new jobs were created and income- earning opportunities expanded. As a result of these efforts, regional levels of educational attainment rapidly converged with global averages. In 1950, the average adult in East Asia and the Pacific had only 1.3 years of schooling—less than half the contemporaneous world average of 2.9 years—but by 2010 the regional average had increased sixfold and converged with the world average of 8 years. This increase in average schooling occurred even as the region’s population more than doubled. Average levels of educational attainment have continued to climb, with more and more students completing secondary school and proceeding to tertiary studies. Compared to 1950, regional schools now provide twice as many students with more than six times as much instruction. Source: World Bank 2018b, Gill et al 2016, Narayan et al 2018 Permani, 2009; World Bank, 2018b; Gill, Revenga, and Zeballos, 2016. 31 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 47 Figure 32: Performance on the human capital index by Indicator, Thailand and comparators SURVIVAL Probability of survival to age 5 Singapore Malaysia Thailand Upper medium income Vietnam Indonesia ASEAN average Philippines Cambodia Myanmar Lao PDR 0 0,2 0,4 0,6 0.8 1.0 SCHOOL Expected years of schooling Harmonized test scores Singapore Singapore Philippines Vietnam Thailand Malaysia Indonesia Cambodia Vietnam ASEAN average Malaysia Thailand ASEAN average Upper medium income Upper medium income Myanmar Lao PDR Philippines Myanmar Indonesia Cambodia Lao PDR 0 5 10 15 0 200 400 600 HEALTH Adult survival rate Fraction of children under 5 not stunted Singapore Thailand Malaysia Upper medium income Vietnam Malaysia Upper medium income Vietnam Thailand ASEAN average ASEAN average Myanmar Cambodia Cambodia Indonesia Lao PDR Lao PDR Philippines Myanmar Indonesia Philippines 0 0.2 0.4 0.6 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0 Source: World Bank Human Capital Index. 48 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL The World Bank created the HCI to assess the conditions that will shape the productivity of the next generation.32 The HCI is part of a broader World Bank Group initiative that emphasizes and health indicators are relatively strong by regional prioritizes investment in people. By anchoring the standards, but its adult survival rate is below the index to economic theory, it raises awareness global median. of the opportunity cost of inaction and bolsters demand for effective interventions. With an HCI score of 0.60, Thailand ranked 65th out of the 157 countries included in the index, The HCI predicts the impact of human capital placing it in the 3rd quartile range. Thailand’s HCI formation on both economic growth and individual score is broadly in line with what its per capita GDP income generation. It encompasses key health would predict (Figure 33). Government efforts to measures, such as the under-five mortality rate, expand basic education and reduce the incidence the under-five stunting rate, and the survival rate of child stunting have yielded substantial gains for adults aged 15–60. It also estimates both the in those areas. Thailand’s HCI score is below the quantity and quality of education by measuring average for East Asia and the Pacific (0.61), but learning-adjusted years of schooling—the expected higher than the averages for ASEAN member states number of years of schooling received by age 18, (0.59) and UMICs worldwide (0.58). Of the nine adjusted to reflect education quality as proxied by ASEAN countries, Thailand has the 4th highest HCI standardized test scores. score, behind Singapore (0.88), Vietnam (0.67), and Malaysia (0.62). Thailand’s performance is on par with or above the ASEAN average on all HCI indicators except Thailand’s human capital gender gap is very small standardized test scores. Thailand’s international by ASEAN and UMIC standards, with women PISA score is 436 out of 625, below the ASEAN slightly outperforming men. Thailand’s male average of 451. Low education quality, reflecting and female HCI scores are 0.59 and 0.61, in part the low scores of students in remote respectively—one of the narrowest gaps among and underserved regions, diminishes gains in ASEAN countries. Of the five HCI components, the educational attainment. While recent student female group performed better on standardized cohorts have attained levels of education that test scores (+17 points), survival past age five far surpass those of previous generations,33 the (+3 percent), and adult survival (+11 percent), demands of the labor force are increasingly and these factors contribute to the gender gap. complex, and substantial disparities persist across College graduation rates among women are also regions and household income levels. Thailand’s significantly higher than those among men.34 32 See Box 7 for more details on the HCI data and measurement methodology. 33 Narayan et al., 2018. 34 UNFPA, 2016. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 49 Box 7 The Human Capital Index: Data and Measurement The HCI is a forward-looking measure designed to capture the amount of human capital a child born today could expect to attain by age 18, given projected health and education conditions. The HCI is calculated based on five quantifiable indicators of survival, education, and health. The Framework for Calculating the Human Capital Index Human Capital Index Contribution to Contribution to Contribution to Productivity Productivity Productivity from Survival from School from Health Expected Years Adult Survival Survival to Age 5 of Schooling Rate Harmonized Not Stunted Test Scores Rate The HCI assesses the five indicators of survival, education, and health in terms of their contribution to productivity relative to a best-case benchmark.36 For example, Thailand’s under-five mortality rate is 0.01 percent, and thus the contribution of the indicator “survival to the age of five” to future productivity is 0.99. The methodology for assessing the contributions of education and health to productivity is more complex and is described in detail in Kraay (2018). The values for all contributions range from 0 to 1, as does the overall HCI score. The HCI does not include some human capital indicators that may be highly relevant in services-oriented or high-tech sectors. These include indicators of cognitive or socio-behavioral skills, as well as educational attainment at the tertiary level. Currently, the HCI can be disaggregated by gender but not by subnational region or other criteria. However, nothing would prevent local governments, which often have access to the necessary data, from calculating the HCI for more specific groups. Moreover, both national and subnational governments could use the same methodology to calculate their own tailored indices based on different parameter values. Kraay, 2018. 36 50 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 33: Human capital index scores and rankings, Thailand and comparators A  HCI scores and rankings B  HCI scores by GDP per Capita Human capital index Human capital index vs. GDP per capita Singapore 0.9 Singapore Vietnam 0.8 Malaysia Human capital index Thailand 0.7 Vietnam ASEAN average Malaysia 0.6 Philippines Upper medium income Thailand Philippines 0.5 Cambodia Indonesia Myanmar Indonesia 0.4 Lao PDR Cambodia Myanmar 0.3 Lao PDR 0.2 0 0.2 0.4 0.6 0.8 1.0 6 7 8 9 10 11 12 Source: World Bank, Human Capital Index. Log Real GDP Per Capita at PPP To converge with the region’s top HCI performers, Raising its PISA scores could significantly improve Thailand must increase its investments in Thailand’s overall HCI score, as the country’s education quality and health outcomes. The performance on other HCI indicators is closer to average performance of 15-year-old students in the frontier. Thailand’s overall PISA test score used each of the three PISA test domains (mathematics, to calculate the HCI was 436. Raising this score to science, and reading) are slightly below what 500 could push Thailand’s HCI score above 7.5, and Thailand’s GDP per capita would predict. Among if its PISA score reached 600, Thailand’s HCI score ASEAN countries, Singapore, Malaysia, and could approach 8 (Figure 34). However, of the 157 Vietnam all outperformed Thailand in terms of countries included in the HCI study, Singapore had both learning-adjusted years of schooling and adult the highest PISA score at 581.35 Even with a PISA survival rates. score of 600, Thailand’s expected HCI would still be below Singapore’s. Singapore outperforms all other ASEAN countries in four dimensions of the HCI, and the fifth—the child stunting rate—is so low that Singapore does not record data on it. Figure 34: Thailand’s actual HCI score and predicted HCI scores based on alternative PISA scores 1.0 0.8 0.6 HCI score 0.4 0.2 0 Singapore (581) Thailand (436) 450 500 550 600 Source: World Bank Group staff calculations based on the methodology used by Kraay (2018) 35 WDR, 2019. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 51 Figure 35: The Learning Gap, Thailand and Figure 36: Learning-Adjusted Years of Schooling Comparators by per Capita GDP 14 14 Learning- adjusted years of education Learning-adjusted years of schooling Singapore 12 12 Vietnam 10 10 Philippines Malaysia Thailand 8 8 Indonesia Thailand Cambodia 6 6 Lao PDR Myanmar 4 4 2 2 0 0 0 5 10 15 6 7 8 9 10 11 12 Expected years of schooling Log real GDP per capita at PPP Source: World Bank Human Capital Index, WDI. UNEVEN EDUCATION QUALITY IS About half of Thai students are below basic A SERIOUS OBSTACLE TO THE proficiency levels in science, reading, and mathematics. One-third of Thai 15-year-olds are DEVELOPMENT OF HUMAN CAPITAL functionally illiterate, meaning that while they know the alphabet and have some ability to read, they Education mobility is rising rapidly in Thailand. In are unable to identify the main messages of an a recent global study, Thailand was the second- age-appropriate text.39 In rural villages, the share of best performer among UMICs in absolute education functionally illiterate children rises to 47 percent. mobility, as almost 85 percent of Thai children According to the 2012 PISA, only 1 percent of Thai born in the 1980s attained higher education levels children are high performers in reading. than their parents.37 Older cohorts, especially those ages 50 and above, have markedly lower levels of In Thailand, the education component of the HCI educational attainment, and only a very small share contributes least to the productivity of the next have a university education. generation. The survival and health dimensions of the HCI are relatively close to the frontier, but However, uneven education quality weakens the education contributes far less to productivity impact of rising educational attainment, and (Figure 37). learning gaps in Thailand are above the averages for ASEAN countries and UMICs. A Thai child born Education quality is highly uneven, and poorer today can expect to obtain 12.4 years of school areas tend to be underserved. Small schools are before the age of 18. However, the same child can under-resourced and face high unit costs; they expect to complete only 8.6 learning-adjusted are also more likely to serve students from poor years of schooling, indicating a learning gap of 3.8 households and marginalized communities. Also, years (Figure 35). Thailand’s learning gap reflects small schools are chronically understaffed, and a shortage of qualified teachers and inadequate their teachers generally less qualified and less educational services for children under the age of experienced. Small schools frequently lack adequate six.38 The country’s numerous small schools tend infrastructure and educational materials, and to have high operating costs and variable levels many are located in poorer regions of the country, of service quality, and consolidation could yield where they predominantly serve students from significant efficiency gains. socioeconomically disadvantaged households.40 37 Narayan et al., 2018. In Thailand, education mobility was estimated using the co-resident sample, meaning differences in education between children and their parents could only be measured for multigenerational households. 38 Lathapipat and Sondergaard, 2015. 39 World Bank, 2016b. 40 Lathapipat and Sondergaard, 2015. 52 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 37: Human Capital Index Components, Thailand 1.0 0.8 0.6 Unit 0.4 0.2 0 Contribution to Contribution to Contribution to Human Capital Index Productivity from Survival Productivity from School Productivity from Health Source: World Bank Group staff calculations based on the methodology used by Kraay (2018) Differences in urban and rural PISA scores have Around half of Thai primary schools are critically widened over time. Although learning outcomes short of teachers. A critical teacher shortage is in Thailand are not highly unequal by global defined as having an average teacher-to-classroom standards,41 the two most recent PISA tests ratio of less than one.44 Thailand’s low teacher-to- indicate that inequality is rising, as the learning classroom ratio reflects both its oversized school gaps observed in the 2012 and 2015 PISA tests network and the misallocation of teachers and other have widened across various measures (Figure 38). educational resources. The proliferation of small In terms of science scores, the difference between schools has created excess classroom capacity, and students in the top and bottom socioeconomic this situation is expected to worsen as birthrates quintiles increased from 1.6 to 1.8 learning-adjusted decline. In other countries with low-quality public years of schooling,42 while the gap between large education, middle-class families have opted out city schools and small village schools widened of public schools,45 which could exacerbate the significantly from 1.1 to 1.8 years.43 PISA scores for challenges posed by excess capacity. A significant mathematics and reading reveal similar patterns. shift toward private schooling could also disengage the middle class from the policy dialogue around education, weakening pressure on the government to improve the quality of public schools. Figure 38: PISA Scores for Science by Household Income Level and Location Socio-econ Top 20% Bottom 20% Rural-urban Large city 2015 Village 2012 350 380 410 440 470 500 Source: OECD PISA 2012 and 2015 41 OECD, 2018. 42 The socioeconomic quintiles used in this analysis are based on the PISA ESCS index. See supra note 2. 43 The PISA defines a village as a community with less than 3,000 people; a small town has 3,001 to 15,000 people; a town has 15,001 to 100,000 people; a city has 100,001 to 1,000,000 people; and a large city has over 1,000,000 people. 44 This ratio includes only full-time teachers employed by the civil service. 45 World Bank, 2018a. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 53 TARGETED REFORMS CAN ENHANCE student learning and reduce outcome inequality. THE IMPACT OF EDUCATION ON Encouraging parental engagement and increasing local financial accountability have been shown to PRODUCTIVITY positively impact student learning.47 Greater school autonomy negatively affects student outcomes in School consolidation developing countries with low-performing education Many key challenges in Thailand’s education sector systems, but positively in more developed countries stem from the country’s numerous small schools, with better-performing education systems, and which provide uneven education quality at a high this relationship holds even when controlling for the unit cost. Addressing the village school challenge presence of complementary institutions.48 could involve: reorganizing small schools into fewer but larger and better-resourced schools; financing Increasing school autonomy in Thailand through schools based on the number of students enrolled, school-level recruitment and staff management therefore incentivizing schools to become larger and would require clear selection criteria and methods. more efficient; improving teaching resources for Currently, teachers are recruited and assigned at small and remote schools; and increasing awareness the provincial level per the rules of the Teacher’s and understanding of the small school challenge. Civil Service Commission. This system does not necessarily provide schools with the necessary A cost-efficient approach could be to utilize staff, as the selection process is excessively existing resources more effectively by optimizing bureaucratic and based on teacher characteristics, its school network or merging small schools. such as qualifications and years of service, Thailand’s vast network of small schools no longer rather than local needs. Once a teacher has been suits the needs of its current and projected student appointed, the school has little influence over his population. A recent mapping exercise revealed or her performance, as professional incentives are that many nearby schools could be merged without managed by the civil-service administration. School- significantly affecting student access.46 While in level teacher recruitment could better align staffing some cases school consolidation would require with local needs, enable school administrators direct administrative action, allocating funds on to create effective performance incentives, and a per-student basis could also encourage schools expand opportunities for professional development. to merge voluntarily in order to leverage economies Local governments should be included in the of scale. selection procedures, and schools and local governments should jointly undertake annual Due to current trends in the retirement rates of formal teacher assessments. School consolidation teachers and administrators, the government would increase the efficiency of local recruitment could rationalize the school network without and school-based management. laying off any civil servants. Over the 2018–2025 period, Thailand could gradually transition toward School councils can encourage parental a smaller school network by shedding excess staff participation and increase the accountability through natural attrition. However, this process of school administrators. Programs designed would need to be carefully planned and managed to strengthen the oversight capacity of school to ensure that hiring remains consistent with councils could help create a social contract between projected student needs. teachers and parents and establish the mutual trust that characterizes high-performing school School management systems such as those of Finland and Korea, where teachers are well selected, have the respect of the Expanding school autonomy while strengthening community, and demonstrate a strong commitment accountability mechanisms could greatly to student learning. School councils would require enhance education quality. The international training to take on these new roles, and provincial- experience underscores the potential of school- level staff would need to be involved in oversight. based management (SBM) reforms to improve 46 The average distance between potential hub and affiliated schools was just 5.3 kilometers. World Bank, 2018d. 47 Patrinos, 2011. 48 Hanushek et al., 2013. 54 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Effective SBM reforms leverage information on and systemic causes of the “learning crisis” learning outcomes to strengthen the accountability described by the 2018 World Development Report of teachers and administrators for student on Learning. performance. The international experience shows that publicizing school-assessment results can help In Thailand, public spending on education has strengthen accountability and improve learning increased steadily in recent years despite a outcomes.49 Brazil’s experiment with “school report continuous decline in the number of students. From cards” in the State of Paraná between 1999 and 2009 to 2015, the inflation-adjusted budget for the 2002 is a particularly inspiring example of a cost- Office of the Basic Education Commission (OBEC) effective SBM intervention—one that Thailand increased by more than 30 percent,52 while the could follow.50 total number of students attending public schools declined by about 10 percent (almost Increasing budgetary transparency could help 1 million students) over the period. Inefficiencies optimize resource use. To improve transparency in basic education spending are most acute at the and accountability, schools could be required to primary level and stem from the proliferation of publish their budgets, while local authorities could small schools and the misallocation of teachers. be required to publish the allocation of resources Preliminary analysis indicates that personnel across schools. Publishing school budgets would expenditures have driven total costs among schools enable parents and communities to monitor how under OBEC supervision.53 efficiently schools were using their resources. In the longer term, school funding should be determined Substantial increases in education spending over on a per-student basis through a transparent and the last 15 years have yielded no significant well-designed funding formula. improvement in learning outcomes. Between 2001 and 2013, total public spending per student per Expenditure efficiency year increased by 143 percent in real terms, and the rate of increase has recently accelerated, with Effective public education spending can equalize per-student spending rising by as much as 48 economic opportunities and build human capital percent in the last three years. Aside from a brief among disadvantaged groups. However, merely spike in performance in 2012, student performance increasing public spending will not necessarily on all three PISA domains declined between improve education quality. For example, a recent 2000 and 2015 despite the massive increase in study suggests that higher levels of education per-student spending over the period. In 2015, spending are not associated with better learning Thailand’s average PISA scores for 15-year-old outcomes when per-student spending already students were 2.5 years behind the OECD average exceeds a certain threshold.51 Reducing inequalities and almost 3 years behind the East Asia and the in education quality and learning outcomes requires Pacific regional average.54 policies that effectively address both the proximate 49 See Hanushek and Raymond (2005) and Carnoy and Loeb (2002) for evidence from the United States, Burns et al. (2011) for evidence from Brazil, and Alvarez et al. (2007) for evidence from Mexico. 50 These “report cards” contained school-level data on test performance for 4th and 8th graders; parents’ views on each school; student promotion, retention, and dropout rates; school characteristics (e.g., average class size, share of teachers with college degrees) from the annual school census; student information (e.g., family socioeconomic status) from questionnaires attached to statewide achievement tests; and principals’ statement about their management style. Whenever possible, comparative municipal and state averages for key indicators were provided so that parents and teachers could compare the performance of their school with that of neighboring schools. Schools were also reported to be performing at, below, or above their expected performance level, which controlled for the socioeconomic background of the students. The three-page summary of indicators was disseminated to parents and teachers at local-level workshops, and the results were published in the state education secretariat’s monthly newsletter and widely disseminated through press releases and press conferences. See Burns et al. (2011) and Winkler (2004). 51 Vegas and Coffin (2015) find that, after controlling for GDP per capita and income inequality, higher education spending is significantly correlated with improved student performance only among education systems that spend less than US$8,000 (in purchasing-power-parity terms) per student per year. In these education systems, mean student achievement on the PISA rises approximately 14 points for each additional US$1,000 spent. 52 Actual spending, however, increased by 27 percent over the 2009–2015 period. 53 According to data from 2015/16, OBEC-supervised schools serve 6.9 million of the 8.6 million students enrolled in the public K-12 school system. Another 2.4 million K-12 students are enrolled in private schools, which are supervised by the Ministry of Education’s Office of the Permanent Secretary. 54 During the initial PISA cycle, test scores were scaled so that the OECD average in each domain (mathematics, reading, and science) was 500 and the standard deviation was 100. Subsequent cycles have been linked to previous cycles through item-response theory methods. A score of 30 points is equivalent to one year’s worth of learning. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 55 Figure 39: Average PISA 2015 science scores and public spending per student, Thailand and Comparators 560 Singapore 530 Average PISA 2015 science scores R2 = 0.56843 500 470 440 Thailand 410 380 350 320 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 Public expenditure per student (constant 2013 PPP$) Source: World Bank staff calculations based on data from the OECD and the UNESCO institute for statistics Note: Data are from the latest year available between 2013 and 2015. 56 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Box 8 Lessons from the Best-Performing Schools in East Asia and the Pacific The most successful education systems prioritize outcomes over outputs, or “learning over schooling”. Aligning the main elements of the school system—including teachers, students, school administration, and educational inputs—to facilitate learning requires: (i) an educational assessment system that accurately captures student progress; (i) a meaningful commitment to adjust the education system based on these assessments; and (iii) effective multi-stakeholder collaboration that enables reform efforts to overcome technical and political challenges. The World Bank’s 2018 Regional Education Study found that the best-performing school systems in East Asia and the Pacific had consistently implemented five general education policies encompassing 15 specific policy actions. These include: ITUTIONS INST PUB T LIC EN S SM PE S SE ND AS ING LEARNING R EA D IN S ER ES TO H AC S LE A RN TE THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 57 I) Institutional Alignment 1. Aligning the activities of educational institutions and administrative systems to ensure the adequate provision of essential inputs and infrastructure. II) Public Spending 1. Devoting sufficient resources to basic education before increasing spending on higher education. 2. Managing essential inputs efficiently. 3. Channeling resources to lagging schools and districts to improve the equity of educational outcomes. III) Teachers 1. Establishing high standards for teacher selection and basing career advancement on merit. 2. Supporting new teachers by routinely observing classroom practices and providing feedback. 3. Clarifying performance expectations for teachers and allowing them adequate preparation time; setting concrete goals for students; and streamlining the curriculum to allow students to master one subject before moving on to another. 4. Encouraging experienced teachers to mentor their peers and conduct pedagogical research. 5. Focusing teacher training on classroom practices and the ability to teach the curriculum. IV) Assessment 1. Using a variety of assessments to measure learning outcomes and benchmarking those outcomes against international assessments. 2. Evaluating cohort progress at every grade level. 3. Using data from classroom assessments to inform instruction. V) Readiness to Learn 1. Promoting children’s physical and cognitive development from birth. 2. Assessing and improving the quality of early childhood education and development services. 3. Leveraging interinstitutional coordination to deliver essential services. 58 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL Figure 40: Stunting Rate, Thailand, 1987–2017 30 25 20 Percentage 15 10 5 0 2012 2013 2014 2015 2016 2017 Source: Thailand Multiple Indicator Cluster Surveys (MICS)/Demographic and Health Survey (DHS)/UNICEF-WHO-WB joint malnutrition estimates, World Bank human capital index, WDI. THAILAND HAS ACHIEVED with healthcare expenses. The incidence of CONSIDERABLE SUCCESS IN REDUCING “catastrophic” health expenditures (defined as more than 10 percent of total household spending) THE INCIDENCE OF STUNTING AND declined from 7.1 percent in 2000 to just 2 percent IMPROVING NUTRITION INDICATORS after universal health coverage was achieved. Over the past several decades, sustained public Successful efforts to improve nutrition have investment in health services has contributed to sharply reduced the rate of stunting. Stunting significant improvements in health outcomes in (defined as a low height-to-age ratio) reflects Thailand. Average life expectancy at birth increased chronic undernutrition, which inhibits cognitive steadily from 60 years in 1970 to 75 years in 2017, development and impairs children’s ability to learn. and the under-five mortality rate fell from 37 deaths Over the past 30 years, stunting rates among per 1,000 live births in 1990 to 10 in 2017. According children under the age of five have fallen from 24.6 to the HCI, 99 out of 100 children born in Thailand percent to just 10.5 percent (Figure 40). Thailand’s will survive to age five, with girls experiencing slightly stunting rate is well below the UMIC average and better outcomes than boys. Thailand’s survival rate the lowest among all ASEAN countries (excluding exceeds the UMIC average and is the third highest Singapore, which does not record stunting rates). among ASEAN member states. Stunting rates declined steadily during the 1990s and early 2000s, plateaued between 2006 and Thailand has significantly expanded the coverage 2012, then declined again over the past five years of health-protection schemes and health- (Figure 41). More modest improvements have been promotion activities. In 2002, the country achieved observed in the incidence of wasting (defined as a universal health coverage through its three major low weight-to-height ratio), which is associated with public health insurance schemes. Expanding access acute starvation and/or severe disease. Wasting to health services and more equitable utilization rates among children under five fell from 7.3 of those services helped reduce the financial percent in 1993 to 5.4 percent in 2016.55 burden and risk of impoverishment associated 55 Thailand Multiple Indicator Cluster Surveys (MICS)/ UNICEF-WHO-WB Joint Malnutrition Estimates. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 59 Box 9 Factors Contributing to Thailand’s Success in Addressing Stunting in the Late 1980s and 1990s Thailand’s nutrition program in the late 1980s and 1990s exemplifies how prioritized, effective, and explicitly nutrition-specific and nutrition-sensitive interventions can transform a country’s nutritional status within a single decade. Four key factors contributed to the rapid decline in undernutrition in Thailand: planning, integration, social mobilization, and local action-oriented surveillance. Planning Planning at both the micro and macro levels followed the basic minimum needs (BMN) approach as part of the Poverty Alleviation Plan (PAP). Under the PAP, communities identified development priorities based on a survey measuring 32 indicators across eight areas, and adequate food and nutrition was the first category on the list. Nutrition-specific and nutrition-sensitive indicators included outcomes such as child malnutrition, low birthweight, and micronutrient deficiencies, as well as outputs such as immunization coverage, antenatal care coverage, and access to potable water and sanitation. At the micro level, teams of community leaders, nutrition and health experts, midlevel government officials, NGO representatives, and district and subdistrict sector chiefs used community-based planning to assess local needs. Based on local priorities, a set of BMN indicators was established, and progress on these indicators was monitored. Working together, service providers and community leaders established plans for a set of nutrition- specific and nutrition-sensitive actions targeted to vulnerable and disadvantaged groups. At the macro level, a core group comprised of nutrition and health professionals, senior government officials, and representatives of international agencies supported these community processes by promoting collaboration among the health, agriculture, education, and rural development sectors. Training and workshops on community- based nutrition programming were organized for district chiefs and reinforced through field visits to communities. International agencies also provided training workshops and grants. Integration Under the PAP, nutrition was understood to be a multisectoral issue that required complementary actions in the health, agriculture, education, and water and sanitation sectors. The PAP facilitated cross-sector coordination and the integration of minimum basic services at the national, regional, local, and community levels. Health components focused primarily on antenatal care for pregnant women, growth monitoring and promotion for infants and young children, and support for breastfeeding and appropriate complementary feeding. Program activities also covered other basic health services such as immunization, oral rehydration therapy, deworming, the treatment of local endemic diseases, and the provision of potable water and sanitary latrines. In addition, individuals, families, 60 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL and communities engaged in agricultural and educational activities designed to build self-reliance through improved food security, income generation, and behavior changes to support long-term gains in nutrition. Projects in the education sector, such as school meal programs and micronutrient supplementation, sought to improve child nutrition. Curricula were updated with nutrition and health education materials, and nutritious food production and consumption were promoted through investments in school gardens and kitchens. In addition to formal educational activities, efforts were made to better coordinate health and agricultural extension services, develop information systems to monitor the nutritional status of vulnerable groups, and educate consumers in healthy and safe ways to select, prepare, and store food. Under the PAP, investments in agriculture included horticulture and animal-husbandry programs designed to strengthen subsistence food production, as well as support for home gardening to produce locally sourced supplementary foods for pregnant women and adolescent girls and complementary foods for young children. Community-based agricultural research through collaboration with universities and research institutions helped identify and address local agricultural challenges. Social Mobilization Service delivery was supported by a cadre of community health volunteers, or “mobilizers,” who were selected by their communities. These mobilizers were trained to implement nutrition programming in collaboration with service providers, or “facilitators,” most of whom were paid healthcare workers, NGO employees, or university or research staff. The program targeted a ratio of one mobilizer to 10–20 households to optimize its reach and effectiveness. The mobilizers were unpaid, but they received free medical services for themselves and their families, as well as public recognition of their work in the form of awards and certificates. Training and support were critical components of the program. Mobilizers participated in an initial two-week training on the theory and practical application of basic nutrition and health interventions, especially antenatal and postnatal care, maternal and childcare practices, birth spacing, breastfeeding, immunization, complementary feeding, and growth monitoring and promotion. The trainings also emphasized communication skills to enable mobilizers to effectively provide information on maternal health, childcare, and nutrition and to generate interest in self-help activities, particularly among women’s groups. Supervision at all levels was vital to the success of the mobilizer program. Facilitators visited mobilizers every one to two months to provide support—rather than police compliance—through on-the-spot trainings and problem-solving, along with technical and managerial information-sharing. This form of regular supervision was highly effective, and it was supplemented with monthly or bimonthly review meetings, as well as communication through social events and printed media. Mobilizers tracked and evaluated impact indicators and used growth charts to discuss and support child development at the community level. Local Monitoring All preschool-aged children received regular weighing and health checks every three months as a screening, educational, remedial, and integrative tool for both mobilizers and parents. Growth monitoring and promotion activities were designed to shift responsibility from health workers to the community by enabling mothers to visualize their children’s growth and take responsibility for improving their nutrition. An evaluation by the Ministry of Public Health and interviews with senior government staff involved in the program suggest that its observation components (weighing and charting) were executed more effectively than both its analytical components (identifying the causes of undernutrition) and its intervention components (providing counseling and support). Since the late 1980s, the share of children refusing to be weighed has declined from 31 percent to 8 percent, while the share that is weighed accurately has risen from 79 percent to 92 percent. However, the causes of undernutrition were analyzed in only 46 percent of cases, and nutrition education was provided to just 64 percent of child caretakers. By the mid-1990s, nutrition indicators were being used in over 95 percent of villages. In areas that experienced rapid improvement, new indicators were added and benchmarks for success were raised. Source: Adapted from Gillespie et al. (2016). « Local to National: Thailand’s Integrated Nutrition Program.” In Nourishing Millions: Stories of Change in Nutrition. Gillespie, Hodge, Yosef, and Pandya-Lorch (eds.), pp. 91–98. Washington, D.C: International Food Policy Research Institute. http://dx.doi.org/10.2499/9780896295889_10 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 61 Figure 41: Multisectoral Interventions to Address Child Undernutrition in Thailand Child undernutrition IMMEDIATE causes Inadequate Multisectoral interventions through dietary intake Diseases community nutrition program and poverty alleviation plan • Water/sanitation • Agriculture (home garden, raising animals, income generations) Community participation • Education (micronutrient Village health volunteer Inadequate Poor UNDERLYING causes Household healthcare water/sanitation supplementation, school meals, food security and feeding and inadequate nutrition curriculum) practices health services • Social protection Household access to Expansion of health infrastructure adequate and services, including BASIC causes quantity and Inadequate Social financial, cultural, • Antenatal care quality of human, physical economic and • Growth monitoring and promotion resources: Land, education, and social political • Micronutrient supplements employment, capital context • Improving infant and young child income, feeding practices technology Source: Author’s illustration based on the UNICEF conceptual framework for undernutrition. Since the 1980s, community-based multisectoral to the observed improvement in health, nutrition, nutrition programs targeting areas of and mortality indicators, especially among children. concentrated poverty have greatly contributed Thailand’s expansion of health services and to the decline in Thailand’s stunting rate. The multisectoral interventions through the PAP and expansion of health infrastructure and human similar programs, supported by strong community resources to rural areas, combined with the participation, have successfully addressed both implementation of community-based nutrition the systemic and proximate causes of child programs, has enabled a majority of mothers and undernutrition (Figure 41). children access to primary healthcare and nutrition services, including antenatal care, micronutrient supplements, guidance on improving infant and NEW HEALTH AND NUTRITION young child feeding practices, growth monitoring CHALLENGES ARE EMERGING and promotion, as well as health and nutrition education, all of which are vital nutrition-specific Even as child health and nutrition outcomes interventions and helped address underlying causes continue to improve, Thailand faces an array of of undernutrition. The community-based nutrition new challenges, including the rising incidence of programming implemented under the PAP (Box 9) noncommunicable diseases (NCDs), overnutrition, helped improve basic infrastructure and services and teenage pregnancy. Thailand’s epidemiological in high-poverty areas nationwide. Investments in transition is proceeding rapidly, and NCDs have water and sanitation services in rural communities, become the leading cause of death. While mortality the inclusion of nutrition education in school and morbidity from communicable diseases curricula, increased agricultural output and food have decreased, the prevalence of diabetes production, and rising rural incomes, all contributed and hypertension have tripled and quadrupled, 62 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL respectively, over the past 15 years. In 2013, NCDs below demonstrates the top 10 causes of premature were responsible for an estimated 82 percent of all deaths (mortality before the age of 65) in Thailand deaths in Thailand,56 and 63 percent of all deaths over the past ten years. Over the last 10 years, were caused by four major lifestyle-related NCDs: cardiovascular diseases have become the second cardiovascular disease, cancer, chronic respiratory and third leading causes of premature deaths after disease, and diabetes. road accidents, and the number of cardiovascular cases is increasing rapidly (Figure 42). The top three risk factors for mortality and morbidity are dietary risks, tobacco consumption, The rising incidence of NCDs, combined with high and high body-mass index. Like many other rates of road injuries, has negatively affected middle-income countries, NCDs in Thailand are no Thailand’s adult survival rate. Only 85 percent of longer largely restricted to the elderly population Thai 15-year-olds are expected to survive until age and wealthier households, but are now increasingly 60. Thailand’s adult survival rate is below both the prevalent among working-age individuals and poor global median and the 86.2 percent average for its households. NCDs impose a significant burden income group and close to the average for ASEAN not just on patients, but also on households, countries (Figure 43). Efforts to address NCDs and communities, employers, healthcare systems, and road accidents, particularly through prevention government budgets, due in part to the potentially and risk reduction, will be essential to improve catastrophic costs of NCD treatment. Figure 42 Thailand’s adult survival rate. Figure 42: Leading causes of premature death in Thailand, 2007 and 2017 2007 ranking 2017 ranking Percentage change 2007–2017 Road injuries 1 1 Road injuries -16.9% HIV/AIDS 2 2 Stroke 11.6% Stroke 3 3 Ischemic heart disease 13.0% Ischemic heart disease 4 4 HIV/AIDS -12.6% Lower respiratory infection 5 5 Lower respiratory infections 33.5% Liver cancer 6 6 Liver cancer 26.0% Cirrhosis 7 7 Cirrhosis 20.4% Self-harm 8 8 Chronic kidney diseases 27.3% Lung cancer 9 9 Lung cancer 13.6% Chronic kidney diseases 10 10 Self-harm -0.1% Communicable, maternal, neonatal, and nutritional diseases Non-communicable diseases Injuries Source: Global burden of disease, institute for health metrics and evaluation. Figure 43: Survival rates and GDP per capita, Thailand and Comparators 1.0 Singapore 0.9 Vietnam Malaysia Survival rate age 15-60 Cambodia Thailand Indonesia 0.8 Lao PDR Philippines 0.7 Myanmar 0.6 0.5 0.4 6 7 8 9 10 11 12 Log real GDP per capita at PPP Source: Thailand Multiple Indicator Cluster Surveys (MICS)/Demographic and Health Survey (DHS)/UNICEF-WHO-WB joint malnutrition estimates, World Bank human capital index, WDI. 56 Burden of Disease in Thailand Program, 2017. THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 63 TO REALIZE THE FULL POTENTIAL OF enabling environment for girls to develop the skills ITS HUMAN CAPITAL, THAILAND MUST necessary to delay or negotiate safe sexual activity. Consequently, many Thai teenagers lack the age- ADDRESS A NEW SET OF HEALTH appropriate knowledge necessary to responsibly CHALLENGES, ESPECIALLY TEENAGE navigate sexual behavior.58 PREGNANCY The recent increase in adolescent pregnancy Adolescent pregnancy is a pressing challenge threatens to undermine Thailand’s success in in Thailand, with significant health, nutrition, improving maternal and child health outcomes, as educational, and economic implications. While well as its broader efforts to accelerate human the country’s total fertility rate has fallen from capital development. Adolescent pregnancy 2.1 births per woman in 1990 to less than 1.5 in has negative consequences for the health and recent years, the adolescent fertility rate is moving nutrition status of infants and teenage mothers, in the opposite direction. In 1990, there were 51 including an increased risk of low birthweight, live births per 1,000 women ages 15–19. This rate preterm birth, infant mortality, and maternal dipped to 43 in 2000, as rising female education mortality. Multivariate analysis reveals that indicators and rural economic development led to teenage pregnancy is one of the most important a decline in teenage marriage. However, by 2012 determinants of stunting, and addressing teenage the rate had rebounded to 53.4, above its 1990 pregnancy is associated with a 11.2 percentage- level. Adolescent births currently account for 16 points reduction in the stunting rate—the greatest percent of total annual births in Thailand.57 The impact of any variable (Figure 44). Teenage rise in adolescent birth rates can be attributed pregnancy is also associated with reduced rates of in part to pervasive economic, social, and school completion, and lower levels of educational technological changes, including a rapid process attainment can limit skills formation, employment of urbanization, compounded by limited access opportunities, and earnings potential later in life, to appropriate sexual and reproductive health perpetuating cycles of poverty and negatively education and services, as well as the lack of an impacting human capital development at the national level. Figure 44: Predicted Probability of Stunting among Children Ages 6–23 Months by Cause 100% Predicted probability of stunting 80% 60% 40% 20% 0% or at st st re l gh ren y ed ra d er n r to ove n ed ve na ea ld t r h ve goo r ha ea fo gh po uc po hi rsi ov ov le in ha ion in ing ge bi s o cy d or fa pre 6 y t d be hi r c ve pr pr e rs w y ed has Al h im er ot et has m 1 im im is fo di an ds to h co rin an p rt t t ac n y ar er co to age t rs gh ar du th im th lf ei et at or g or ll ei pr Mo l r ok es ac -a Vi s ct ol olde il di w g lth co sh se lf he er h a ea Ba rt tt r’s ct ll d fa A Bi w Be M he H H H ot H M Source: Nutrition in Lao PDR: Causes, determinants, and bottlenecks, World Bank, June 2016. 57 Jitsuchon, S. et al. 58 Jitsuchon, S. et al. 64 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL In summary, while Thailand has made remarkable CONCLUSION progresses in improving the health and nutrition outcomes of its population, accelerating human Equalizing economic opportunities can set capital development will require addressing a in motion a virtuous cycle of human capital new set of challenges. Thailand’s achievement development and accelerated growth. As the of universal health coverage and its remarkable outcomes of children become increasingly gains in health outcomes, especially in the areas independent of the circumstances of their birth of maternal and child health, offer important or the characteristics of their parents, rising lessons for developing countries worldwide. economic mobility enables individuals to escape However, Thailand now faces new challenges as intergenerational poverty traps and promotes a it strives to improve adult survival rates and more efficient allocation of human capital. Inclusive extend life expectancy by addressing the rising growth further increases economic mobility, which incidence of NCDs. Meanwhile, a recent increase promotes national cohesion, improves public in adolescent pregnancy rates requires urgent perceptions of social fairness, and encourages action to consolidate gains in maternal and child general optimism regarding the direction of the health and to enhance human capital development country and the future prospects of individuals and and promote the general welfare of women and households.59 children. Narayan et al., 2018. 59 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL 65 Box 10 Reforming Institutions for Tackling Inequality in Thailand The government of Thailand aims to tackle inequality as part of the national strategy by establishing an inequality watchdog unit and enacting a set of bills to strengthen rural development. The inequality watchdog is expected to help address long-neglected institutional challenges: miscoordination between government agencies as well as lack of a designated body, plan and target, subject expertise, and effective funding. In addition, the aforementioned set of draft bills seeks to reduce inequality of opportunity by enabling rural communities across the country to have access to natural resources, financial services, opportunities to start their own businesses, and fair contracts. In doing so, the government aims to strengthen capacity at the grassroots level for sustained inclusive growth. I. The Inequality Watchdog In December 2018, the cabinet endorsed the establishment of the national inequality watchdog as a special unit under the National Economic and Social Development Board (NESDB). Thailand will have, for the first time, a unit dedicated to inequality and poverty reduction. The unit will be supervised by a national board chaired by the Prime Minister and key ministers and tasked with performing three main functions: 1) Target The inequality watchdog will make use of “big data” to facilitate targeted policy-making. The unit will develop comprehensive integrated databases on inequality and poverty. The big data database includes real-time data such as financial and business transaction data, satellite data, electricity usage, mobile phone and internet usage, welfare payment, and locational data on the Thai People Map and Analytics Platform (TPMAP). In addition, the unit will set the targets and create a set of indicators beyond traditional indicators (i.e. Gini). Potential indicators include the community strength index, sustainable development index , and the World Bank Human Capital Index. Also, the unit will produce research and reports on inequality and poverty on a regular basis. 2) Integrate The inequality watchdog will be the main government agency for driving the national strategic and reform plan on inequality and poverty reduction. The unit will ensure that key projects on inequality proposed by each ministry are in line with the 20-year national strategy and the national reform plan. In addition, the unit will prioritize key projects to receive special budget allocation for addressing inequality. 3) Streamline The unit will work closely with the Bureau of Budget (BOB) through the formation of a special NESDB-BOB committee to allocate budgets for tackling inequality, using agenda-based and area-based budgeting. Also, the unit will perform ex-ante policy assessment to assist BOB in budget allocation for the following years. 66 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL II. The Enactment of Key Draft Bills to Narrow Rural-Urban Gaps To strengthen rural development and narrow rural-urban gaps, a set of draft bills will be passed by the National Legislative Assembly (NLA) in February 2019. The objective is to empower rural communities by facilitating access to resources necessary for growth such as financial services, natural resources (i.e. land, forestry), and know-how on business formation, thereby reducing inequality of opportunity and allowing rural communities to grow sustainably. Previous attempts at enacting such bills proved unsuccessful due to institutional resistance to decentralization of power. However, the overall reform momentum has picked up in recent years. In addition to supporting rural development and human capital investments, addressing top incomes and redistribution of wealth and income through a progressive tax system will also be important for keeping inequality in check. The recently introduced property tax (Land and Building Tax) effective on January 1, 2019, is a step in the right direction. Table 5: Key Draft Bills to Empower Community and Narrow Rural-Urban Gaps Draft Bills Main Content The Community-Based • The act enables local saving groups who meet the minimum requirements to be Financial Institution registered as a community-based financial institution. The CBFI network will be (CBFI) Act promoted and supervised by the MOF. • The act aims to promote rural community development by enabling locals to form their own community banks, thereby increasing financial access and the quality of financial services, reducing informal debt, and unnecessarily high transaction costs. CBFIs will also support the development of community businesses and community welfare funds. The National Saving Fund (NSF) will also distribute their product through this network to enhance the retirement saving rate. • Bank of Agriculture and Agricultural Cooperatives (BAAC) and Government Savings Bank (GSB) are designated as incubator banks to support the development of the CBFIs. In doing so, they will provide accounting software, management know-how, and several wholesale finance initiatives to the CBFIs (e.g. the land bank initiative, micro-insurance, etc.) • The registered CBFIs are required to use the accounting software provided by the incubator banks, which records real-time financial transaction data. The data will constitute one of Thailand’s most important big data on rural development. The Community • The act designates one unit under the Ministry of Agriculture and Cooperatives Enterprise (MOAC) to serve as a one-stop service to support and promote community Promotion Act enterprises (wisahakit chumchon), and encourage those that are ready to be registered as formal legal business entities. • The unit will also coordinate with other government agencies including Specialized Financial Institutions (SFIs) to offer financing, management know-how, product development, and R&D for community enterprises. The Community • The act empowers communities to actively engage in forest management, Forest Act protection, and usage. The act also enables local government units to facilitate local people’s engagement in forest management. The Social Enterprise • The act sets an ecosystem for long-term development of social enterprises (SE). Promotion Act This includes the establishment of the national board for SE development, the SE promotion office, the SE fund, and key measures to promote SE development. The Act on Unfair Land • The act protects citizens, particularly farmers, from unfair land repurchase Repurchase Contract contracts, and from unknowingly losing their lands especially during liquidity shortages. • The act stipulates that land repurchase contracts shall be supervised by the government to prevent unfair contracts. It also sets guidelines on the contract formulation and procedures. Any contract that does not comply will be rendered void. The Contract Farming • The act aims to prevent farmers from being exploited by big corporations and Promotion and forced to engage in unfair farming contracts. Development Act • The act sets guidelines for contract formulation, dispute resolution, mediation mechanism, and determining factors for contract farming agreements. 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World Development Report 2019: The Changing Nature of Work. Washington, DC: World Bank. 70 THAILAND ECONOMIC MONITOR INEQUALITY, OPPORTUNITY AND HUMAN CAPITAL CONTACT US World Bank Thailand Tel: +662 686-8300 30th Floor, 989 Siam Piwat Tower Email: thailand@worldbank.org 989 Rama I Road, Pathumwan www.worldbank.org/thailand Bangkok 10330 facebook.com/worldbankthailand