Economists around the world and over the years have drawn a myriad of solutions to eradicate poverty, yet all were to no avail. A multitude of growth theories from past to present have been followed by the governments of numerous developing economies, but only a handful have been successful in generating high incomes for citizens.
In the wake of World War II, developing countries such as those in Latin America, Africa and South Asia, in pursuit of economic betterment, implemented sweeping reforms, emulating the models of developed nations. However, far from bridging the gross domestic product gap between themselves and the First World, most of those countries actually ended up poorer.
For instance, a paper by Antonio Fatas and Ilian Mihov of Insead Business School says: “30 years ago, Venezuela had a per capita income of $7,100 [about 224,000 baht]. Despite its proximity to the largest market in the world, oil resources and investment rates fluctuating between 15 percent and 19 percent, Venezuela still stagnated. In the more recent years, the economy has even declined and its current annual income is less than $6,000 [190,000 baht] per person. People of Venezuela are poorer today than in 1975.”
A group of modern economists led by Justin Yifu Lin, former chief economist of the World Bank, has proposed a “new structural economics” alternative that draws on the premise of preceding development ideas and growth theories.
The argument goes that in order to achieve a sustainable and robust economic convergence, economic development must undergo piecemeal reforms. The market should be a key agent in the transition process and the government should focus mainly on facilitating a healthy shift to a more capital-intensive economy (building more tangible and intangible infrastructure) and coordinating all stakeholders to ensure a sound course of market development.
The question is not about becoming capital intensive, but adopting a sensible strategy that aligns with the country’s current comparative advantage.
Ultimately, as the country becomes more productive and advances closer to a technology frontier, prices would rise accordingly.
Rising wages relative to real production would induce firms to incline towards capital equipment, as a result transforming both the country’s comparative advantage and optimal industrial structure.
More importantly, efficient market allocation is critical to the optimal transformation process in which firms are required to revise their factors of production ratio (capital to labour) to accommodate the dynamic comparative advantage. Under this condition, firms will be highly efficient at producing outputs in both domestic and global markets. Therefore, in order to create such an environment, a competitive and undistorted market must be promoted.
Should a low-income country neglect its factor endowment structure and deliberately channel its limited means to highly capital intensive industries, the attempt would likely fail because the economy will not produce outputs at its comparative advantage, and will therefore be less efficient and competitive vis a vis its foreign competitors. A country adhering to its comparative advantage will also gain from what Lin calls “the advantage of backwardness” by borrowing technologies and industries from advanced countries.
This backwardness will allow firms to converge with rich countries faster as they need not spend as much on innovation cost as first-mover countries. Once the economy has risen to a certain level, factor endowment and industrial structures will deviate from the older optimal structures and new structure upgrades must be introduced.
In other words, every level of development requires a specific structure to accompany it; there is no “one size fits all” strategy for sustainable growth.
As for Thailand, it is necessary for policy makers to promote economic development that is in tune with its national comparative advantage. Thailand is abundant in its primary resources. It is a leading producer of rice and commodities. The majority of its population still works in agriculture, while its main GDP contribution is extracted from manufacturing and heavy industries.
Thailand has long been hitting the middle-income trap wall. The government should keep in mind that an economic structure is not a choice but a natural course of economic transition from an agriculture-based economy to a higher-income industrialised economy.
In bypassing the course without strong foundations, the country may see only short-lived growth. It is time to rethink our industrial strategy and structure so that national growth will continue apace and with greater sustainability. Truly this is an elusive quest, yet the pay-off would be highly rewarding.