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Thailand’s cost edge eroding

The potential return of Thaksinomics has business and political commentators chattering about the effect the ambitious policies of the new Pheu Thai government may have on Thailand and its neighbours.

While Yingluck Shinawatra grabbed attention on campaign trail with promises of price guarantees for farmers and free tablet computers for students, perhaps no proposal has been as contentious as her pledge to raise the minimum wage to 300 baht per day.

Beyond the domestic chatter, the policy has piqued the interest of regional competitors keen to see how it will affect key Thai industries.

With income inequality in Thailand among the world’s highest, there is little debate that something must be done to close the rich-poor gap; Thailand’s richest 20% earn roughly 58% of the country’s income, versus 4% for the bottom 20%. Meanwhile, with unemployment low and factories short as many as 100,000 manufacturing jobs last year, according to the World Bank, upward pressure on wages is inevitable.

The Abhisit Vejjajiva administration recognised this, proposing a minimum wage increase to 250 baht per day, but Pheu Thai’s proposal is more dramatic, representing a 40% increase on the current average minimum of around 165 baht, which now varies by province.

The Thai Chamber of Commerce has estimated that the 300-baht daily wage would equate to a monthly wage of US$260, which would put pressure on the country’s garment industry. It comprised 4,300 firms employing just over one million people as of 2010, according to data from the Asean Federation of Textile Industries.

Thai Chamber of Commerce chairman Dusit Nontanakorn has warned of major drop in foreign direct investment and says Thailand risks losing its competitive edge to other nations in Asean if the new government goes ahead with its plans to raise the minimum wage.

He notes that Malaysia’s minimum wage is only 10% higher than that of Thailand while wages in Indonesia are 10-20% lower than in Thailand.

A daily wage of 300 baht nationwide would make Thailand more expensive than other production bases in Southeast Asia and in the long term, foreign investors may consider relocating to other countries such as Vietnam, he said.

Thailand attracts FDI of about 400 billion baht per year. If the country raises minimum wages, FDI is likely to drop 25% a year or 100 billion baht, Mr Dusit said recently.

The eventual integration of the region under the Asean Economic Community (AEC) by 2015 could also make Thailand less attractive. Investors have many choices for their investments and there would be little need for them to be based in Thailand if the cost does not justify their returns, he said.

“Wage levels in Thailand are still more attractive than its more developed competitors South Korea, Hong Kong, China and Taiwan, while its skilled workforce is more efficient than its lower-cost neighbours,” the report from Thai Chamber of Commerce said.

This dynamic could shift, however, with the introduction of the new minimum wage and the development of the industry in neighbouring countries. In Indonesia, the monthly minimum wage in Jakarta is $182, according to the Japan External Trade Organisation. In China’s coastal provinces, minimum wages range from $167 to $197, while sitting at $107 in Hanoi and Ho Chi Minh City and $101 in Cambodia. In Bangladesh, the figure is just $54 a month.

While Thailand’s garment sector has distinguished itself in the past by producing higher-value, more sophisticated products, Vietnam in particular has closed that gap and stands to benefit from an increase in Thai labour costs.

The slashing of tariffs within the region under the AEC, meanwhile, will likely make production cheaper for countries such as Cambodia that cannot source their own raw materials.

Whether or not all workers will benefit from increases is another matter. As of 2009, the International Labour Organisation said roughly 25% of workers in the Thai manufacturing sector were likely earning less than minimum wage.

This problem is most acute among migrant workers, who typically labour in low-skill industries such as manufacturing and food processing, and it remains unclear whether they will benefit from the increased minimum wage as Thai workers will.

It is estimated that nearly 2 million migrant workers, including nearly 1.5 million from Burma, are legally registered in Thailand, along with thousands more who are undocumented.

Andy Hall, an expert on migrant labour at Mahidol University’s Institute of Population and Social Research, said the increased minimum wage would be “certainly one factor” drawing more migrants to Thailand. However, he said it would be only one of a number of issues driving migrant flows, pointing in particular to continued labour shortages.

“Essentially, they’re coming into Thailand because there’s work for them to do,” he said.

Higher-skill sectors such as the automotive industry will enjoy more of a buffer. While the Thai auto industry will continue to face competition regionally from countries including Indonesia and India, Thai Automotive Industry Association president Piengjai Kaewsuwan said earlier this month that most employees in the industry already earn more than the minimum wage.

Any effects from the wage bump for carmakers will also be blunted by Pheu Thai’s proposed cut of the corporate income tax from 30% to 23%. The auto industry hopes to ride continued investment from international firms including Toyota and GM to a production goal of 3 million vehicles annually by 2015, up from 1.65 million last year and pushing the country into the top 10 globally.

Pheu Thai leaders have talked of the minimum wage bump forcing businesses to focus more on developing the capacity of their workers, and they would do well to follow the lead of the auto industry and similar sectors.

“It’s a good opportunity for Thailand to focus on increasing the skills of the Thai workers and moving beyond low-cost, exploitative, low-quality industry,” Mr Hall said.

Source: Bangkok Post

ThaiVest Editorial Team

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