“Promoting SMEs and getting Thailand out of the middle-income trap are my priorities”

February 2016

Kiatchai Sophastienphong, Thailand’s vice minister of finance, talks about his immediate national economic priorities under the new government, which includes relocating high-value industries to Thailand.

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Here is the transcript of the video.

Emmanuel Daniel (ED): I want to draw from you an aspect of your role as a technocrat in a transitionary government. Do you see this position that you’ve taken on for yourself as a career position, or is it a national service position given where Thailand is today?

Kiatchai Sophastienphong (KS): I would say it’s more a national service than a career because I don’t expect to remain longer than 18 months.

ED: And in those 18 months that you have with government, what are some of the most important priorities that you have set for yourself?

KS: I have put together some of the things that I would like to do for the government, for the country, within this short time span. One is promotion of small and medium enterprises. I feel that the government has been very serious, very earnest about helping SMEs. But there seems a coherent policy seems to be lacking. As of last count, we have over 30 various government agencies helping the SME sector. There’s a lack of coordination, a lack of collaboration. Even the budgetary issue was put together only recently by the prime minister.

So because of that, I hope to bring some clarity to the whole SME promotion agenda. I see it more as a national agenda as opposed to a Ministry of Finance or Ministry of Industry agenda. That is the first priority I have set for myself. The second priority is to see if I could help, in any way, to implement the government’s policy of harnessing industry’s potential to take Thailand out of the middle-income trap. The government has identified five industries, mainly high-tech industries. Basically, these are the next-generation automobile, the next-generation health care. We’re already a center of health care, as you know. People come for treatment. But we want to move to the next stage. We want to change from becoming an OEM producer to producing things ourselves under our own brand names. To do that, we need to get high-value industries relocated to Thailand. That’s the second priority that I have set myself to.

ED: These priorities appear to me to be technical. How do they fit into the overall priorities of the country at the moment? Thailand, like a lot of Asia, is still struggling to be attractive as a foreign direct investment destination. The current political uncertainties can slow down those priorities. A lot of what you seem to be doing appears to be more supply-side-driven. Is that a correct understanding, because the priorities that you’ve set require a push from government, or government resources? Or is that demand-side-driven, that is, to create an environment that is conducive to the markets functioning normally? How do your technical priorities fit into what seems to be the more urgent priorities of the country at the moment?

KS: Well, we are facing major challenges this year with the Chinese economy going through an adjustment period. Some people foresee a hard landing in China with the currency being rather volatile and the stock market going through an adjustment period. On top of that, commodity prices are low and the price of oil has dropped to a $30 level. So we start off this year with a lot of negative factors internationally. Luckily, the government last year sent out on a major agenda to rebalance the economy. What I mentioned to you is part of the rebalancing policy. My job is to help implement these policies.

Let me explain to you how this SME promotion and bringing in foreign dollar investments in five high-tech industries would help rebalance the economy. Until recently—even now, I think, to a certain extent—we have been dependent on traditional labor-intensive industries. But the government realized that we could no longer compete with neighboring countries since our labor cost is high. If we are to move up to the next value chain, we must do something more competitive, something with high-value assets. Something with more innovation, something with more technological advancement. And that’s why the government is moving away from traditional labor-intensive industry to high-growth, high-value asset industries.

ED: How does that tie in with the fact that ASEAN is supposed to be more open now? You will need to open up your country to competition from other Asian countries. How does that factor into your agenda of increasing the value added of the country itself?

KS: In many ways, Thailand has already opened up. We have been a trading partner of ASEAN countries for the last 10 years or so. We have harmonized tariffs and labor law. The only thing left in a big way is financial integration. We still have individual, separate financial sectors. Thailand has its own banking sector that is not integrated with the rest of ASEAN. With the ASEAN Economic Community, we are going to embrace these last aspects of the common market by allowing qualified Asian bankers to open up anywhere. The same Thai banks can open branches in Singapore, in Malaysia, and so on. Until now, that has not been that easy.

As to capital markets, ASEAN still does not have a single integrated capital market. Thai companies continue to issue bonds in Thai currency. We don’t have Malaysian companies coming to Thailand to issue bonds or to raise equity. What we hope to see through capital markets opening up is to have bonds issued in different Asian currencies, to have different companies from different countries in ASEAN issuing bonds anywhere they want.

ED: That’s the intention. But with competition comes distortion. A lot of your former banking colleagues are still in the banking industry. They may want you to slow down a little bit or give them a grace period to acclimatize. And, in fact, I would even say that it’s quite surprising that the Thai banks haven’t regionalized as quickly as they could have. There were opportunities to go into the Indo-China region much faster. But Thai banks seem to have taken their time doing that. Is there something that needs to be done to prepare Thai banks and Thai corporates for this greater liberalization?

KS: An area I see in terms of preparation is banking consolidation, with the exception of the top four major banks. The other Thai or foreign-owned banks are too small to compete in a bigger regional grouping. So I see some consolidation happening in the next few years in Thailand, with the medium-sized banks merging to be able to compete.

ED: Do you foresee it? Or do you want to encourage it?

KS: We are giving encouragement. But the Thai way is to do it behind the scenes rather than through forceful mergers as I think they did in Malaysia and, to a certain extent, in Singapore.

ED: As to the regionalization agenda, is Thailand closer to the developed Asian members like Malaysia, Singapore, Indonesia, rather than to its immediate neighbors? Is there more that you can achieve with Cambodia, Laos, and Myanmar than you can with the rest of Southeast Asia? How do you see the dynamics between Thailand and the developed and/or developing countries of Southeast Asia?

KS: That’s a good question, one that I have not thought of. So my off-the-cuff answer would be to see how to enlarge the market for Thai products, and to see how we compare with our Asian neighbors where we see a lot of cooperation in terms of investment, especially in high-tech industries. How are they as they emerge from being closed economies? It would take time before the developing economies reach maturity, before they reach a level of sophistication before they can be fully integrated with the rest of ASEAN.

In contrast, Singapore, Malaysia, Indonesia (to a certain extent), and Thailand can be integrated in the financial sector because we share a lot in common, and we have reached a certain level of financial deepening.

ED: In the time that you worked at the World Bank, did you see yourself as more of an economist or as a policy implementer?

KS: More as a policy implementer. I started my career working in South Asia, mainly to restructure state-owned commercial banks in India, Pakistan, Sri Lanka, Bangladesh, and so on. Subsequently, my job has been, in large extent, to cover central bank reform, introducing changes to the way central banks work, and also helping introduce new laws.

I want to answer the other part of your question about financial integration. Luckily, we have international standard-setting bodies like Basel for capital adequacy. Since all the five countries I mentioned have more or less embraced MOF, I don’t see difficulty in financial integration. It’s just a matter of space. Singapore is one step ahead of us. But before long, Thailand and Malaysia will follow.

ED: You’ve set for yourself this goal of taking Thailand out of the middle-income trap, of which several Asian countries that were successful in the 1990s have a problem moving out of. And you’re trying to do it when global trade is slowing down. The countries that have become middle-income did so because of their capabilities in the trading world as manufacturing countries, as exporting countries. Now that global trade is slowing, do you think that you need to change your thinking a little bit? Is there a domestic market that you think needs to be developed? Also, how are you absorbing the slowdown in China, the slowdown in global trade, the lack of capital flows? How are you absorbing that in your policy approach?

KS: I think Thailand has a sufficiently large domestic market to have its own industries. We don’t really need to trade some of these products that we talk about unlike some of our neighbors that have gone the same route. They’re much smaller in terms of economy; for example, Taiwan and Singapore. So they need to do it through the trade arrangement. Whereas Thailand is fortunate. For example, we have sufficient internet penetration—probably No. 1 in Asia. So that alone is sufficient to entice people like Google to relocate closer to Thailand.

Unless you are internationally active like Singapore, it may be more difficult if you don’t have a large, domestic market. Thailand has that domestic market.

ED: You have the domestic market, but I couldn’t tell from the way you described your policy objective whether you’re going to be supply-side-driven or market-driven.

KS: The supply–demand relationship is a dynamic one. Sometimes, in our opinion, you do clear the amount starting with the supply side. But you’re right, my thinking is more on the supply side. My vision is to see these high-tech industries move to Thailand, to relocate here. I would like to see something akin to the Silicon Valley in Thailand. But then we need not only tech and other financial incentives, we need other factors. For example, we need to have qualified scientists. We need to have qualified engineers. We need to have people who speak English who can communicate. We need to be able to entice young and promising engineers and thinkers to come over.

ED: What you’ve already achieved as a country is being a major hub for automobile manufacturing. And you’re part of the supply chain.

KS: As an OEM producer.

ED: Yes. And you achieved that with the education system that you have, with the pool of talent that you have, and the infrastructure that you have put in place. But to move to the next level, you need better English, for example; or an international language of some kind. It could even be Chinese. And the workforce needs to be of a higher level. Can you achieve a lot of that in the 18 months you’ve set for yourself?

KS: At the top level, we can because we have already introduced the talent mobility program under which the top scorers from Thailand who study overseas but who refuse to come back will be encouraged to come back through good jobs, good careers, and good working environment. That’s why we want to create an environment where they can work and realize their potential. The reasons why they don’t come back are because they feel they can earn more money, and they work in a very challenging environment, abroad. So we have to create that environment at home.

At the lower level however, it will take longer because the educational system is still not conducive to producing a good English-speaking labor force. That would definitely take longer than two years.

ED: Do you then, as a citizen, want to see this as a temporary process? Or is that a question you’re not asking yourself at the moment?

KS: I see this as temporary because the prime minister already announced to the public and to the international community that a new constitution is being drafted. And the election will be held. So in 18 months’ time, we will have a new government. So, that part is clear and has been conveyed to us in no uncertain terms.

ED: Let me ask you finally, about your role in the current government. Given that the military has set up the government’s infrastructure, how do technocrats like yourself see your role in the government structure as it exists right now? And how would you describe your relationship with the political process? And are you comfortable with it, do you see yourself as being useful in it? Do you see yourself achieving specific goals? Or are you concerned that the work you’re doing might not be sustainable in the future?

KS: Luckily, we enjoy harmony in terms of decision making. There’s a clear line of command. The government, at the top level, is decisive. It has a clear vision, a clear mandate. They know exactly what they want. And we don’t suffer from this political bickering or ideological disagreement. So I find it much easier to work in this environment because I’m given a clear mandate. I’m given a clear target. And I’m given a clear timeframe.

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