Thailand 4.0 — Growth, the Eastern Economic Corridor and FDI

Answers

(a)(i) [2]

The general price level is rising (inflation is positive in both years), and rising at an increasing rate — inflation accelerated from 0.67% in 2017 to 1.1% in 2018.

(a)(ii) [2]

Nominal GDP growth $= (506.5 - 456.3)/456.3 \times 100\% = 11.0\%$ . Subtracting inflation, real GDP growth $= 11.0\% - 1.1\% = \mathbf{9.9\%}$ .

(b) [4]

Two impacts of Thailand 4.0. Better infrastructure and technology raise the quality of capital, shifting the PPC outward from PPC₁ to PPC₂ (potential growth). Lower unit costs raise export competitiveness and production, moving the economy from a point A inside the curve to a point B on it (actual growth).

First, Thailand 4.0 improves infrastructure and adopts technology, raising the quality of capital and so productive capacity: the PPC shifts outward (PPC₁→PPC₂) — potential growth. Second, the resulting fall in unit costs raises the price competitiveness of exports, raising production and moving the economy from a point A inside the PPC to a point B on it — actual growth through fuller use of resources.

(c) [4]

Competitive supply means two goods use the same factors, so producing more of one requires producing less of the other. Soya beans and crickets are in competitive supply — both use land. As demand for sustainable food (crickets) grows, the price of cricket products rises, incentivising producers to switch land from soya beans to crickets, so the supply of soya beans falls.

Market for soya beans. Producers switching land to crickets shifts soya-bean supply left S₁→S₂; with price-inelastic demand, price rises sharply from P₁ to P₂ while output falls less than proportionately from Q₁ to Q₂.

The leftward supply shift creates a shortage at $P_1$ , pushing the price of soya beans up from $P_1$ to $P_2$ and lowering output from $Q_1$ to $Q_2$ . Because demand for traditional food is price-inelastic (changing consumer mindsets takes time — a high degree of necessity), the price rise is more than proportionate to the fall in quantity.

(d) [8]

The thesis is that the EEC will improve Thailand’s balance of trade in the long run but may worsen it in the short run, so the extent is time-dependent.

For improvement. Concentrating the ten industries within the EEC, with new airport and seaport infrastructure, lowers transport costs — external economies of concentration. Lower costs raise the price competitiveness of Thai exports; assuming export demand is price-elastic, a price fall raises quantity demanded more than proportionately, so export revenue rises and the balance of trade improves.

Against — short-run drag. The US$45bn infrastructure build takes time and itself consumes resources, causing congestion that raises transport costs in the short run, eroding export competitiveness. And the EEC relies on imported technology and capital goods, raising import expenditure sharply, which worsens the balance of trade.

Judgement. To a large extent the EEC will improve Thailand’s balance of trade in the long run, once the infrastructure is complete and external economies of concentration lower export costs. But in the short run it is likely to worsen the balance of trade first, as capital-goods imports surge and construction raises costs — consistent with Table 1, where Thailand’s trade surplus fell from US$44.0bn (2017) to US$28.5bn (2018) as the EEC was established. The extent of improvement is therefore positive but lagged.

(e) [10]

Firms invest where expected profit (TR − TC) is highest, so the question is whether a lower corporate tax does most to raise the after-tax return. The thesis is that, in Thailand’s specific context, the corporate-tax cut is the best instrument, because its rivals are weaker here.

For — the tax cut. A lower corporate tax raises after-tax profit directly, lowering the effective cost of investing and raising the return — strongly incentivising FDI.

Against — alternatives. A more skilled labour force would raise productivity and lower unit costs over time, attracting FDI; but Extract 8 shows Thai skill quality is weak (too few qualified PhD instructors, a greying workforce, no immigration of talent), so this advantage is unrealised in the short run. Innovation grants (US$790m) offset high R&D costs and could attract R&D-intensive FDI. And rival destinations — the US, China, Singapore — rank higher for FDI attractiveness on technology, infrastructure and reputation, and attract global talent through open immigration, which Thailand will not match.

Judgement. Lowering corporate tax is the best policy for Thailand given its constraints. The decisive consideration is comparative advantage among the instruments: the 50% tax cut over five years is a large, immediate and certain incentive, whereas Thailand’s skill-upgrading is hampered by instructor shortages and a greying, closed labour market, so it cannot deliver in the relevant horizon, and Thailand cannot out-compete the US, China or Singapore on technology, infrastructure or talent attraction. Its realistic edge is therefore the tax exemption plus relatively low labour costs — making the corporate-tax cut the most effective available lever, though it would be less decisive in an economy whose skilled-labour and infrastructure offer already rivalled the leading destinations.