Thailand Fails to Escape the Middle-Income Trap

Foreign companies have always viewed Thailand's political instability as a major risk, and the country has tended to take heavy hits from external shocks such as the Middle East war. Thailand was an agrarian country until the 1980s. Under military-led governments it opened to foreign capital and foreign companies, rural residents moved to cities, and manufacturing grew on the back of low-wage labor. Tourism also expanded greatly during this period, buoyed by the boom from the Vietnam War.

Rural residents moved to cities to provide low-wage labor, and foreign direct investment became active. As companies from Japan, followed by Korea and Taiwan, set up operations in Thailand, manufacturing boomed and exports rose. As urbanization advanced, the middle class also grew, but this growth model persisted without any shift in industrial structure. Alongside manufacturing growth, tourism developed significantly on the back of the Vietnam War boom, giving Thailand a growth pattern different from that of typical developing countries.

Korea developed through heavy and chemical industries, electronics, and automobiles to semiconductors and the fourth industrial revolution. Thailand, however, has remained in automobile and electronics assembly and tourism rather than heavy and chemical industries. This industrial structure has persisted from the 1980s to the present, and growth has stagnated as a result. This is a main reason Thailand has been unable to escape its low-growth trap.

Japanese automakers built large assembly plants near Bangkok, and Japanese and Korean home appliance companies also moved into Thailand. This economic structure, centered on manufacturing and tourism, has continued from the 1980s to the present. Because the industrial structure has not been transformed, the country faces declining productivity. Thailand's economy remains heavily dependent on specific industries and lacks diversity.

As a result, Thai people avoid hard manual labor. Meanwhile, advanced industries have not developed, producing many workers stuck in an in-between middle tier. Thai society has a term, 'Lang Ngan,' that looks down on manual workers from neighboring countries, and a distinction is drawn between high-skilled foreigners from developed countries, called 'Farang,' and others.

Because the industrial structure has not been transformed, attracting foreign direct investment (FDI) has also been sluggish. Domestic firms lack the capacity and technological development needed to support FDI, making it hard to find new growth opportunities. Moreover, unlike developing countries, Thailand faces a serious aging problem. The fertility rate fell from 6 in the 1960s to 1.0 in 2024, and 20% of the population, or one in five, is 60 or older. The lack of a pension system has also emerged as a serious problem.

However, the pension system has not been properly established. According to a World Bank survey, enrollees in the government pension system make up only one-third of the population. The remaining two-thirds face uncertain livelihoods after retirement. There are also no measures or strategies to secure old-age income for informal workers, so many people rely on family support or part-time work to get by after retiring.

Fewer than 5% of Thailand's population aged 60 and over live on pensions. The government lacks adequate plans to support its rapidly aging population, which also strains national finances. At its core, Thailand's economy needs to upgrade its industrial structure quickly and respond actively to change, as Singapore has done. Yet Thailand has not shown signs of making such a move.

Thailand is one of the countries with the most military coups in the world. Since the 1932 constitutional revolution, governments have changed frequently, and military intervention in politics has become routine. Each time a new government takes office, the constitution is changed and laws and policies are altered continuously. Conflicts and confrontations between political parties are severe, and the public is also divided into camps. This political uncertainty makes foreign companies doubt the continuity of the Thai government's policies.

In Thailand, where political uncertainty is high, private investment is bound to shrink. There is no guarantee that the military will refrain from staging a coup at any time, and because the military is split into factions that behave like interest groups, the possibility of coups to pursue their own interests persists. This political instability acts as a major factor with negative effects on the Thai economy. Long-term projects such as education policy and infrastructure construction can also be halted when governments change, which reduces the appeal of Thailand to foreign companies.

Thailand has attracted many tourists with its 'Amazing Thailand' slogan, but there was a period during the COVID-19 pandemic when almost no visitors entered the country. The tourism industry, too, is suffering because its industrial structure has not been upgraded in time. Backpackers and package tours alone are no longer enough to make Thailand an attractive destination. Even Korean tourists are now looking to Vietnam, Indonesia, Japan, and China rather than Thailand.

When the Middle East war broke out, the tourism industry across Southeast Asia took a hit, and Thailand was no exception. European tourists visiting Thailand fly there, so rising oil prices pushed up airfares and reduced the number of visitors.

Thailand's tourism industry is vulnerable to such external factors. The core of Thailand's manufacturing is automobile and home appliance assembly. A large automobile assembly plant sits east of Bangkok, and it operates mainly as a production base for Japanese companies using assembly-based production. Thailand is structured so that it reacts sensitively to rises in global crude oil prices and suffers direct damage to its tourism industry as a result.

Thailand's automobile industry was centered on internal-combustion diesel and gasoline vehicles and pickup trucks. Japanese cars dominated the domestic market, and the country assembled vehicles for export. Recently, Chinese electric vehicle companies have been moving in actively alongside Japanese firms. Chinese companies focus on producing electric vehicles rather than internal-combustion cars, and the battery industry is growing in importance. Because Thailand drives on the left and has right-hand-drive vehicles, Chinese EVs produced at Thai production bases are advantageous for export to Southeast Asia, Australia, the Middle East, and Europe.

The Thai government is paying close attention to the automobile industry and is pushing the '30@30' policy. The policy sets a target of raising the share of zero-emission vehicle production to at least 30% by 2030. This shows the government's will to shift the industrial structure from internal-combustion vehicles to electric vehicle production. Electric motorcycle production is also included in the transition. The government's strategy goes beyond domestic sales; it aims to develop Thailand into an electric vehicle production base and export hub.

Although Thailand's economy faces many negative conditions, its potential for development remains open. It has a solid manufacturing base and existing infrastructure in automobile and electronics industry clusters, along with the advantage of a populous region with a developed tourism sector. It also sits at the center of Southeast Asia, in a very favorable location for logistics and geography. Thais take great pride in their geographic advantages, so much so that they regard their country as the 'center of the Earth.' With good sea routes linking East Asia, the Middle East, and Europe, Thailand has great potential as a logistics hub.

If it fails to solve its current economic structure, political instability, and aging problem, Thailand will find it hard to escape the middle-income trap. It stands at a crossroads where it must find new engines of growth based on its existing strengths.

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