A slowdown in the value of global trade, relative to the expansion of the world’s gross domestic product as a result of structural changes in global trade, means the Thai economy can no longer depend heavily on exports to drive growth in the coming years.
That is the opinion of the World Bank Group and the Thailand Development Research Institute (TDRI), who also warned that changes in the global value chain could hurt Thailand even further, especially in terms of trade with China.
Thailand’s fiscal policy is expected to remain “pro-cyclical” and this has contributed to a lower-multiplier effect.
Therefore, the government must adhere to fiscal “counter-cyclicality” to increase the fiscal space and the effectiveness of fiscal policy by improving institutions, adopting more fiscal rules and introducing a medium-term budget.
Ayhan Kose, director of the Development Prospects Group at the World Bank Group and the lead author of the 2015 Global Economic Prospects report released in Bangkok yesterday, said long-term factors explained the global-trade slowdown more than the current weak demand.
Kose said the sluggishness of global trade would likely persist over the next two to three years as a result of a slowdown in global investment and consumption.
He said high-income countries accounted for 65 per cent of total global imports while exports contributed to 70 per cent of Thailand’s gross domestic product.
“The type of expansion in the global supply chain we use to observe in the late 90s and 2000s is no longer there in the sense that the expansions we’ve been observing in Europe and Asia have been slowing down… In addition to this observation, the global supply chain has matured, which means that the background for trade has been slowing down while the nature of trade is also changing,” he said.
“Given the weak global economic recovery that we are projecting, global trade will remain weak as well in the coming years but countries can reverse the trend by conducting policies that enhance economic growth at the national level and at the global level.
“It will be very important to undertake measures to remove impediments that prevent a free flow of trade of goods and services,” he added.
He explained that the maturation of the global value chain may be responsible for the decrease in trade elasticity, where Chinese manufacturers, for example, have increasingly relied on the domestic supply of parts and components more than importing them.
Imports of parts and accessories of capital goods to total exports of capital goods in China had declined from more than 70 per cent between 2000 and 2005 to less than 50 per cent between 2010 to 2013 while China’s imports of parts and components in total exports of merchandise had declined from an average of 50 per cent from 1990 to 2015 to less than 40 per cent from 2006 to 2012.
Kose said reshoring and lengthening the domestic supply chain had also contributed to the decline in trade of manufacturing products, especially in intermediate goods and the automobile sector, where United States firms, for example, had expanded their home-based production after the global financial crisis due to increasing cost competitiveness in the US.
Meanwhile, the increasing trend of restrictive cross-border trade measures, especially based on hygienic, environmental and quality-standard grounds, had also contributed to slower global trade.
The volume of global trade had been suppressed by declining commodity prices, which were expected to stay at low levels for a few years and usher in a period of low inflation globally and monetary policies with more room to accommodate the recovery, if need be.
Kose said wider fiscal space made fiscal policy more effective and building fiscal space was crucial for developing countries, especially when faced with growth and financial risks.
Somchai Jitsuchon, research director of Inclusive Development at TDRI, said the Thai government should establish a parliamentary budget office (PBO) and “budget court” along with other “fiscal rules” to increase transparency in non-budgetary practices and the two-sided budget (compulsory plus expenditure), which could help build future fiscal space.
“Thai governments, previous and present, have the habit of spending when economic growth is bad so there is no money to spend on investment while being reluctant to spend when economic growth is good… This type of fiscal pro-cyclical practice, populist policies and bad investments by state enterprises have contributed to a lower fiscal space,” he said.
“And in order to increase the space, the government must follow a fiscal counter-cyclicality practice, hurry up with the introduction of the Thai PBO to increase transparency and the effectiveness of fiscal policy while eradicating populist policies and adding more commitment to government spending on investment.”
First Published: The Nation, February 3, 2015