THAI ECONOMY: EFFECT OF US SLOWDOWN

Faculty Contributor : Rupa Chanda, Professor

Student Contributors : Parvathi Nair L., Pomil Katoch
The US economy is currently undergoing a recession. The general perception is that the
rate of growth of the emerging economies is linked with the rate of growth of the
developed economies. But the question is whether this will hold true in the current
scenario where other economies like China are emerging as economic superpowers.
This article investigates this issue by studying the effect of US recession on the Thai
economy.

"For the past hundred years, the rate of growth of output in the developing world has
depended on the rate of growth of output in the developed world. When the developed grow
fast, the developing grows fast, and when the developed slow down, the developing slows
down. Is this linkage inevitable?"
~ Sir Arthur Lewis, 1979 (Nobel Prize Lecture)
Thai Economy is characterized by a period of high growth from 1986-1991,
with an average growth rate of 10.3% followed by a period of crisis from
1996- 1998 during which the export growth of Thailand became zero and
the GDP growth became negative. Thailand recovered from the crisis and
this recovery was led by the manufacturing sector. USA is one of its major
trading partners of Thailand and Thailand being an open economy is
vulnerable to the fluctuations in external demand. Moreover USA is one of
the top investors in Thailand. Thus, Thai economy has a great dependence
on the US economy. Thus the linkages between the US economy and the
Thai economy, and the effect of the recession, in particular, make for an
interesting study.

The Thai Economy

Exhibit 1. Thailand's international transactions pattern (% of GDP)

 Exhibit 1 shows that exports and imports as a percentage of GDP are much
higher as compared to FDI and FII implying that trade is more important
driver of growth for Thai economy. This is evident from the fact that the
share of trade in Thailand's GDP has increased steadily over the past
several years to reach a high of about 140% with exports accounting for
about 75%.1
Further analysis done by regressing the natural log of Thailand's real GDP
with natural log of other independent variables: Thailand's real exports,
real imports, FDI into Thailand, and FII into Thailand revealed that exports
are the most important driver of growth for Thailand as the coefficient of
exports came out to be the highest compared to the other variables.
Granger causality test, which measures the causality between two factors,
conducted between Thailand's real GDP and Thailand's exports revealed
that the exports are a cause of GDP growth in the case of Thailand.

Major Trade Partners

Having establishing that trade is the most important driver in case of
Thailand, the next step was to see how the trade relations of Thailand with
the major trading partners such as the US, EU, Japan, ASEAN and China
have been changing over the years.

Exhibit 2. Thailand - Country-wise Real Exports share (%) to major export destinations
Though a time-series-regression between the Thai-GDP and exports to
each destination showed that exports to the US, EU, and Japan has driven
the Thai growth the most, but from Exhibit 2 it can be observed that the
percentage share of exports these countries has decreased with time. The
percentage share of exports to ASEAN has remained almost constant and
 the percentage share to China has increased over time. "Thai producers
have come under pressure from sluggish domestic demand and a
slowdown in exports to the US to push harder in new markets, and seem to
have been aided by Thailand's free trade agreements." Some of the
developments in Thailand which helped it to divert the trade to
destinations other than US, EU and Japan are given below:2,3,4

• Thailand became a member of the World Trade Organization (WTO),

the Cairns Group of agricultural exporters, and also a part of the ASEAN
Free Trade Area (AFTA).
• Thailand has got into many free trade agreements. A China-Thailand
Free Trade Agreement (FTA) commenced in October 2003. This
agreement was limited to agricultural products, with a more
comprehensive FTA to be agreed upon by 2010.
• A limited Free Trade Agreement with India was commenced in 2003.
• A comprehensive Australia-Thailand Free Trade Agreement was started
on 1 January 2005. For example, exports of automobiles and parts to
Australia surged after this bilateral agreement.

Dependence of Import Growth on GDP Growth for the US and

China
As the major portion of export decrease to the US was being taken up by
increase in exports to China, the next step was to study if the slowing
down of the US economy and the booming of the Chinese economy would
significantly affect the growth of exports from Thailand to these respective
economies. For this the dependence of import growth of these economies
on their GDP growth was studied.

Exhibit 3. Scatter Plot: Log of US Real GDP v/s Log of US Real Imports
Exhibit 3 shows that when the GDP of the US increases the imports to US
also increase. Thus it could be concluded that in the case of the US, the
 GDP growth will promote growth in imports. So the GDP growth of the US
will have an effect on the exports coming to the US from other countries
which is justified by the fact that the exports from Thailand showed a
decrease in 2001 when there was an US slowdown.

Exhibit 4. Scatter Plot: Log of China Real GDP v/s Log of China Real Imports
Exhibit 4 again illustrates that when the GDP of China increases the
imports to China also increase. Thus in the case of China, the GDP growth
promotes import growth. So the GDP growth of China will have an effect on
the exports coming to China from other countries which corroborates the
fact that the share of exports from Thailand to China is now increasing.

Role of FDI in Thailand

FDI is important for a country like Thailand although the direct effect of FDI
growth on Thailand's GDP growth is insignificant. The FDI growth has an
indirect effect on export and hence an indirect effect on Thailand's GDP
growth since Thailand is an export-led economy. Some researchers have
proved that FDI inflows might stimulate economic growth of a country from
the perspective of technology transfer and spillover efficiency. This is due
to the absorption of tangible and intangible assets of Multi-National
Corporations (MNC) by the domestic firms. In addition, the forward and
backward FDI linkages and the role of MNC in providing technical
assistance to the domestic firms also contribute to increasing of the
technology and productivity level.
Thus it is important to study the sources of origin of FDI and also about the
destination sectors. The FDI coming to Thailand from US has reduced in the
recent years. Instead, China is emerging as an FDI partner of Thailand.
China's policy towards FDI has recently changed from emphasizing the
attraction of FDI to encouraging Chinese firms to invest overseas.
Presumably the biggest recipient of Chinese FDI in ASEAN has been
Thailand. In September 2003 there were 242 mainland companies with
operations in Thailand. Future Chinese investments in Thailand are bound
 to be influenced by this China-ASEAN Free Trade Agreement (CAFTA),
which was signed on December 2, 2004 and will take affect by 2010.

Current Status of the Thai Economy

In order to analyze the current health of the economy the balance of
payment position of Thai economy was plotted over the years (see Exhibit
55).

Exhibit 5. Thailand: Balance of Payment

It can be seen that in 1997, the year when the Asian crisis happened, the
balance of payment of Thailand was negative. The deficit in the current
account balance was because till 1997 the imports were more than the
exports and thus there was a deficit in the trade balance. In 1997 the
balance of payment position of Thailand had become negative because
there was a net capital outflow in addition to the deficit in the current
account balance. After 1997 it can be seen that exports became more than
imports and that the inflow of capital was coming mainly through FDI.
In 2007, there was an increase in exports in spite of the slowing down of
the US economy and appreciation of the baht. The imports also increased
but this increase is not significant enough to drive the trade balance
negative. There was a positive flow of net services income and thus the
current account balance was positive. In 2007, there was suddenly a
significant outflow of capital in terms of FII which drove the capital account
balance negative. The net capital inflow in terms of FDI also reduced in
2007. This was in contrast to the increase in the inflow of capital in terms
of FII and FDI in 2006. The most interesting point is that in spite of there
being a net outflow of capital the balance of payment position in 2007 was
more positive than that in 2006. This shows that in the present scenario
trade is much more important to the Thai economy as compared to capital
inflow and within trade, exports are more important than imports. Overall
the Thai economy is in good health and seems to be sustainable even
when the US economy is on a slowdown.
Conclusions
Thus from the facts that the ASEAN is having greater FII share in Thailand
compared to the US; the US share of Thai exports has been declining
steadily from about 20% just prior to the financial debacle of 1997-98 to
slightly above 10%; Chinese share of Thai exports has jumped from 3.1%
to about 10% today; and that Thailand's exports to US amount to only
about 9% of its GDP as compared to about 20% for Singapore, Malaysia,
and Hong Kong, it can be concluded that Thailand is decoupling from the
US. It is even more evident from the graph below (Exhibit 6) which shows
an increase in Thai growth while US growth is on decline since 2006.

Exhibit 6. Thai growth vis-a-vis US growth

Now the question that remains is that as we have seen in the case of
Thailand are the other emerging economies decoupling from the US in the
wake of the US slowdown. Some of the observations in this regard are that
the total trade of the emerging economies with the industrial countries has
decreased from 70% to 50%, exports to the US as a percentage of GDP is
becoming miniscule in many of these emerging economies (China -8%,
India - 4%, Brazil - 3%, Russia - 1%); trade share to US of many of these
emerging economies is retreating (India's export share to the US has
decreased from 22.8% to 17% since 2000, India's import share to US has
decreased from 7.15% to 6% since 2000); share of exports to China of
many of these emerging economies has increased from 2000 to 2007
(Taiwan: 3% to 24%; South Korea: 11% to 22%; Hong Kong: 34% to 49%;
India: 5 times increase; Philippines: 3 times increase) and that the intra-
regional trade has increased (14.7% of total exports and 14.4% of total
imports of Singapore are with Malaysia; Japan is Taiwan's second largest
trading partner with 21% of total trade). Thus, other emerging economies
also seem to be on the path of decoupling from the US.
Contributors
Rupa Chanda is a Professor in the Economics & Social Science Area at IIM
Bangalore. She holds a Ph.D. in International Trade, Macroeconomics from
Columbia University and a Bachelors degree in Arts from Harvard
University. She can be reached at rupa@iimb.ernet.in
Pomil Katoch (PGP 2007-09) holds a B.Tech. in Electronics and
Communication from National Institute of Technology, Hamirpur. He can be
reached at pomilc07@iimb.ernet.in
Parvathi Nair L. (PGP 2007-09) holds a B.Tech. in Applied Electronics
from College of Engineering, Trivandrum. She can be reached at
parvathin07@iimb.ernet.in
Keywords
Economics, Econometrics, Thailand, USA, ASEAN, Coupling, Decoupling