U 5123854

CRWF8000 Assignment I

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Sophea Ly CRWF8000 Professor Steven Howes, Dr Ida Kubiszewski, Ryan Manuel Assignment I 1498 words

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and innovation-based products and services (Kharas and Kohli 2011). the country faces a challenge in sustaining high growth and continuing to benefit from globalization. the country managed to graduate from a lower-middle income economy to an upperr-income one according the World Bank’s announcement on 1 July 2011. the last decade of Thailand growth performance has been strongly deviated from its long-term trend. political violence. The trap therefore invites a new growth strategy to address the underlying causes of growth stagnation. identify its binding constraints and then propose various alterative options to avoid or get out of the trap. Having experienced growth challenges caused by rural drought and flood including the recent severe flood in 2011 (the worst in 50 years). Under diminishing returns to capital 2 . This upgrade reassures Thailand is on track toward the high income country thanks to stellar growth performance during the past half-century (1952-2011) at the average growth rate of 6. Global economic events such as the oil price shocks in 1973 and 1979. As Thailand has remained in the middle-income ranking for more than 20 years (since 1988). However.2 per cent per annum in real terms. The paper will thereby discuss the issues of Thailand middle income trap. coupled with the recent growth slowdown under political uncertainty. labor and technology. The growth accounting can be explained by the Solow growth model with production function of capital. the ASEAN Financial Crisis in 1997/98 and the Global Recession 2008/09. all these aspects increase the possibility that Thailand is in the middle income trap (Jitsuchon 2012) Middle-income trap occurs when the middle income country lose its growth momentum due to rising labour and capital costs that hinder competitiveness with lower-income countries with low-cost manufactured exports and also unable to compete successfully with highly-skilled producers in the advanced economies with knowledge. the tsunami in 2004. Thailand’s mediumterm growth rate (11-year moving average rate).U 5123854 CRWF8000 Assignment I CRWF 8000 Case 1 Thailand: economic growth achievements and challenges Although Thai society appears to be deeply-divided since the 2006 coup. has dropped sharply at just 4 per cent compared to the approximately 7 per cent or higher during the period 1963-1993 (Jitsuchon 2012).

41. p. Rodrik(2003) introduces simple economic thinking about the determination of income with the total economy output as a function of its resource endowments (labor. Similarly. and increasing the productivity of not only the manufacturing. Kharas and Kohli (2011. However. 3 . 2013).4 per cent) and employment as percentage of total employment (38. For Thailand. but also the agriculture and services sectors (Jitsuchon 2012. 48. growth in technology can offset the diminishing returns on capital and thereby increase Total Factor Productivity (TFP) allowing an ongoing increase GDP per capita. however growth will not be sustained without technological progress.U 5123854 CRWF8000 Assignment I accumulation.2 per cent) (WDI. the paper comes up with three policy options for sustained growths: education reform policy. human capital) and the productivity. not just on expanding sales of the same product to existing markets. Growth accounting based on extended Solow model incorporating human capital/skill labor leads to the conclusion that rich countries invest a large fraction of their resources in physical capital and in the accumulation of skills. Higher saving/investment rate also move the GDP capita to a higher steady state. Innovation policy and political institution reform. Given the above growth literatures and Thailand economic and political context. physical capital. 16) also criticizes Thailand’s institutional weaknesses for failing to implement appropriate policy choices to make the country more innovative. p. pp. and thereby improve their productivity and conversely for the poor country. integration (trade). 56). He further explains growth with deep determinants including geography. growth will continually slowdown and eventually stop (reach a steady state). Somachai (2012. (Jones 1998. Sustaining its growth toward high-income status and avoiding the middle income trap requires a policy reform that addresses the undersupply of human capital through investment in education. the agriculture sector is relatively labor intensive in term of lower value added as percentage of GDP (12.285) suggests that on supply side middle income growth strategy should move up the value chain with a capital -and skill-intensive manufacturing sector and progress towards service industry. He further argues that the export expansion is difficult due to high wage rate and decline cost competitiveness and export growth should therefore depends on introducing new processes and finding new markets. institutions. Warr 2011).

p. create competitive environments for private and public education institutions towards quality assurance. Linking R&D to industries. Jitsuchon (2012. Innovation Policy Innovation contributes to Total Factor Productivity (TFP) in growth accounting. pp. and thus discouraging investors from investing in production that makes use of highly skilled workers and employees. and provide scholarship and loan financing scheme for higher education. alternative clean energy technology.16-17). of sufficient quality and available to the broad society. Thailand can also increase their engagement in other new development environments such as climate change. Thailand needs to develop their R&D 4 . Thailand does not fit such a profile. is a necessary condition for sustainable economic growth.U 5123854 Education Reform CRWF8000 Assignment I Jimenez et al (2012. which lead to completive challenges. while not sufficient.6) points out that the quality of education in Thailand is not up to the standard of the highest Asian performers in world rankings. link higher education to R&D initiatives and industry sector to increase relevance and quality of universities and research institutions. R&D policy will generate positive spill-over effect and enhance the Thailand competitiveness with advanced economies in higher-value added and more supplicated products. It’s also a lack of political will in the public sector and lack of right incentive in the private sector (Jitsuchon 2012. Thailand has a low level of research and development (R&D) budget with the ratio of R&D spending to GDP at around 0.2 per cent annually for years. education promotes productivity and therefore need to be relevant. which enables countries to move from labour-intensive production to technology or capital intensive one. p. However.16) acknowledges that Thailand’s education system is not suitable for the labor market in the global competition. They also underline a sound education system. universities and research institutions will also help enhance the relevance and quality of Thailand education.4. Thailand education reform should prioritize budget for basic education available to the whole population as well as early-childhood development such as pre-school and kindergarten. provide incentives for teachers.

the Privy Council and the military exist beyond the control of the elected government. Public pressure could help bring democracy process in the right course.U 5123854 CRWF8000 Assignment I capacity and expand their pool of researchers and technicians with a long-term R&D investment. Military reshuffle by the prime minister must have official approval from the palace and Privy Council. However. and highly centralized power. Second. military and Privy Council in politics need to be openly discussed through public and academic debates and researches. First. The monarch.and anti Thaksin forces seem to show no signs of diminishing. p431) argues against sustained growth under authoritarian rule and then offer two reasons why growth under extractive institution dominated by elites cannot be sustained. and social conflict is growing as these systems cannot fulfill the expectations that industrialization has created”. 17 different constitutions and 18 actual or attempted military coups including the most recent one in 2006. the military present ominous challenge to the formal rules of the elected civilian government (Chamber 2010). The polarized societies with growing tensions between pro. p. political power under extractive industry is highly coveted. Thailand has gone through 26 generational elections. Thaksin Shinawatra. Eng(2012. the roles of monarch. The King can then legitimize the political resolution. Political Institution Reform The politics of Thailand is currently conducted within the framework of a constitutional monarchy and parliamentary democracy. Second. Acemoglu et al (2012. pushing societies towards political instability. 5 . Thailand should make clear to the international community that coup-culture is no longer acceptable. The political institution reform should first fix political polarization and instability with the national reconciliation plan through political negotiation amongst stakeholders. which continue to further distract the government in power from implement the long-term economic growth policies and end up with economic populist to gain electoral votes. hierarchy. Since becoming constitutional monarchy.169) describes “the country's politics and bureaucracy remain trapped in an archaic culture of patronage. sustained growth requires innovation which is a result of creative destruction. Since 2006 coup against the thenprime minister.

Reynolds (1981) introduces a hypothesis that “the single most important explanatory variable for economic growth is political organization and the administrative competence of government”. p. and the structure of political arrangements. Political stability and committed and capable government institutions will enable Thailand to focus on its economic reform favouring productivity-improving investment through education and innovation policy. The paper therefore argues that the most binding constrain for Thailand’s sustained growth is to address political institution reform which provides necessary conditions and enabling environment for other economic reforms.U 5123854 Policy Proposal CRWF8000 Assignment I Many scholars have emphasized the critical role of institution in carrying out growth policy reform.151) argues that the innovation policy implementation depends on the desire of political leaders to promote innovation and relevant institutions. 6 . Doner(2009.

. ‘What is the middle income trap. World Development Indicator . Elsevier. The world Bank. 20. viewed 16 August 2013 2013. A & Ritchie. Part A. vol. Thailand Development Research Institute Quarterly Review. Asian Survey. viewed 15 August 2013 2013. 835-58. 4. CI & Romer. pp. population and human capital’. in A Philippe & ND Steven (eds). W. CI 1998. no.worldbank. institutions. P 2010. 281-9. 2. and how can it be avoided?’. vol. no. Rodrik. Nguyen. American Economic Journal: Macroeconomics. <http://data.U 5123854 CRWF8000 Assignment I References Bank. Eng. P 2011. Chambers. <http://www. in D Rodrik (ed. Jones. pp. RF. June 2012. Doner. V & Patrinos. ‘Thailand in a Middle-income trap’. Kharas. W. Inc. D 2003.). Stuck in the middle? human capital development and economic growth in Malaysia and Thailand. World Bank 2013. Introduction to economic growth. vol. The Washington Quarterly.org/en/news/press-release/2011/08/02/thailand-now-uppermiddle-income-economy>. Warr. 26. ‘Political Challenges of Innovation in the Developing World’. ‘The New Kaldor Facts: ideas. ‘Thai democracy: the people speak’. HA 2012. ‘Thailand on the brink: resurgent military. P 2010. pp. 1. Homi & Kohli. no. vol. Handbook of Economic Growth. S 2012. pp. a nation caught in the middle-income trap. 151-171. ‘Chapter 14 Growth Strategies’. BK 2009. Hicken. PM 2010. H 2011. no. pp. USA. Thailand. vol. Review of Policy Research. 5. why do countries fall into it. Thailand Now an Upper Middle Income Economy. Princeton University Press. <http://www. Global Journal of Emerging Market Economies. Rodrik. East Asia Forum Quarterly. viewed May 5 2013. Jitsuchon.eastasiaforum.org/2011/12/18/thailand-a-nation-caught-in-the-middleincome-trap/>. ‘What Do We Learn from Country Narratives?’. Jimenez. Norton & Company. 967-1014. 50. E. Jones. vol.worldbank. 169-89. Volume 1. eroded democracy’. 224-45.org/indicator> 7 . W 2011. D 2005.

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