Our production base for electronic

Our production base for electronic products and vehicles came as a result of decades of consistent economic policy on foreign investment. A combination of incentives for foreign manufacturers, low-cost labour and economic zones called industrial estates have attracted globalised firms and their suppliers in the automotive and electronics sectors in particular. They have turned these industrial estates into efficient and interconnected industrial hives, and Thailand became a middle-income country along the way. However, Thailand now needs a new growth paradigm as we are facing the predicament of a "middle-income trap" as well as exposure to troubled economies in customer countries. Thailand must indeed look for new economic drivers.

The central question is whether the old export-driven model should be abandoned, or merely updated to better suit current conditions. Thailand's thought leaders have put fundamental economic reform on the table based on recent experience. The 1997-'98 Asian financial crisis taught the country's leaders to fear financial sector instability and capital flight. The 2008 global financial crisis left it exposed to factors beyond its control. And the 2011 flooding, as well as other recent natural disasters such the Japanese tsunami earlier in the year, is another argument against relying on global manufacturing and the just-in-time efficiencies this industry thrives on. Manufacturing in Thailand is a complex ecosystem on an unstable platform. Risk is on the rise, and the current government has made reducing reliance on exports a significant part of its economic policy - the so-called "Dual Track Development Model".

The diagnosis is known but the remedies are not. What is obvious is that unlike other Asian economies such as China, India or Indonesia, the scale of domestic demand will not be sufficient to drive growth - Thais total around 65 million people, far smaller than those other three, and therefore domestic demand alone will not create economies of scale. Plans floated so far appear to be focused on a common set of prescriptions for medium-sized countries at this stage of economic development: pushing for more indigenous entrepreneurship and coaxing foreign firms to locate research-and-development operations in the country, as well as lower-wage assembly jobs. Some policy evolutions to move beyond manufacturing have already begun. A change in corporate tax rates will drop the percentage paid by local firms to create parity with the foreign companies in the economic zones by 2013, and the incentives traditionally offered to foreign investors are under review by multiple government ministries. Thailand also aims to attract higher-end jobs by creating tax incentives for foreign companies willing to locate regional headquarters here.

Ignoring exports in a drive to create higher-paying jobs could be overkill, however, and a middle way could mandate simply adjusting the approach. Thailand and other Southeast Asian export-driven economies are increasingly trading with each other instead of selling to the world's richest countries. In some cases they are sending each other semi-finished goods, which will eventually end up in the traditional export markets. But as finished goods become a larger part of the total, a formal policy response to this trend may be needed to recalibrate the manufacturing sector for a different set of customers. The government seems to recognise that exporting will still be important. Our prime minister made state visits to some of Thailand's traditional foreign investments sources in March, including Japan and South Korea. Public statements by Yingluck from the trip reiterated the message that our industrial estates are open for business and Thailand still wants foreign companies to locate in them. Thailand still has some strong advantages for growth as labour is not too expensive, despite wage rises in 2012, but ultimately it needs to move up the value chain. There needs to be a change in mindset so that many Thai industries recognise that they can no longer rely on labour-intensive industries.

In addition to lowering corporate taxes for indigenous companies, the incentive structure for foreigners is under review. The Board of Investment (BOI) is tasked with attracting FDI, and has in its arsenal incentives aimed at 243 types of businesses. Tax holidays can be up to eight years, and waivers are available for the value-added tax and import tariffs. The cost to Thailand's treasury of these incentives is more than Bt200 billion a year. I think both the Finance Ministry and the Industry Ministry must together review the BOI toolkit and make recommendations for changes. There are about 1,000 ventures in Thailand that have been established by foreign interests enticed by BOI incentives. That compares with about 500,000 companies registered in Thailand that operate without any tax breaks.

As we all know, the government has approved a reduction in corporate tax rates, lowering them from 30 per cent to 23 per cent in 2012, and to 20 per cent for 2013. This will create parity among local companies and the foreign ones operating with incentive packages. Although the two do not by definition compete with each other, it is hoped that this move will boost the chances of indigenous leadership and creativity in the economy. Lower rates could also coax companies now operating informally to formalise their existence, therefore boosting tax revenue.

Looking ahead, we must adjust our export sector to reflect the growing regional trade story. Economies in Southeast Asia have proved more resilient than expected since the 2008 financial crisis, helped by prudent financial regulation keeping the banks healthy, and steady demand within the region. But the intra-regional trade story did not start then - the crisis only made it obvious. In reality intra-regional exports in Southeast Asia have been growing at a faster rate than global exports for more than a decade. Exports from the Asia-Pacific region doubled between 2000 and 2009, but intra-regional exports rose almost 2.5 times. In Thailand, China became the largest trading partner in 2010. China's share of Thai exports has roughly tripled in the past decade, from about 4 per cent to about 12 per cent. Meanwhile the euro zone's share of exports fell from 17 to 11 per cent, and North America's from 22 to 11 per cent. For Thailand, moving to a regional focus would to an extent mean shifting some of its exposure. That would not eliminate exposure to outside factors, and it is increasingly difficult to find importer countries not exposed to global sentiment. But the new trade patterns have thus far spread risk thinner and that should mean a reduction in exposure to external shocks, at least in theory.

I think the question is now whether a policy shift and money spent to embrace this trend would be worth the trouble. Thai policymakers and economists should focus on the question by pondering issues such as whether the industrial sector in Thailand would require capital expenditure or organisational reforms in order to target a different group of customers, and whether chasing the rewards of regional trade is a zero-sum game that would imply turning away from old markets, or rather, something that can be done in tandem. Regardless of how the next era takes shape in the Thai economy, continued investment in social assets and infrastructure will be necessary. That means spending to improve schools and vocational training, adding transportation assets such as broadening the public transit system in Bangkok, and increasing liquidity and sophistication of capital markets, both to give companies more financing options and to encourage Thais to move their money out of savings accounts and into securities. Strengthening pension programmes and unemployment-insurance services would also help funnel cash toward consumables and encourage companies to hire. Boosting efficiency in the agricultural sectors will help by combating food price shocks, which are on the rise in recent years due to global instability and increased speculation on commodities through financial markets.