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Economy

Thailand's iconic railway project set to deepen economic divisions

Eastern Economic Corridor unlikely to benefit rural areas as birthrate stagnates

Thailand's Prime Minister Prayuth Chan-ocha cites the Eastern Economic Corridor project as a model of private-public partnerships. (Nikkei montage)

BANGKOK -- At a recent international business conference, Prime Minister Prayuth Chan-ocha stressed the importance of the public and private sectors cooperating to upgrade Thailand's economy.

Prayuth, who hosted the ASEAN Business and Investment Summit on Nov. 2 in Bangkok, cited the Eastern Economic Corridor project as a model of private-public partnerships. 

For decades now, Thailand's economic growth has been driven by the development and evolution of its manufacturing sector, sometimes referred to as the "factory of Asia."

But that engine is now sputtering, with the nation apparently having fallen into the so-called middle-income trap, the loss of export competitiveness by a middle-income economy due to rising labor costs.

Prayuth's policy response is his "Thailand 4.0" program, which offers investment incentives for 10 priority industries, including high-value-added areas like next-generation automobiles, digital technologies and robotics.

The EEC, which encompasses the three eastern provinces of Chachoengsao, Chonburi and Rayong, is meant to serve as the springboard for the Thai leader's ambitious agenda. The government will spend 1.5 trillion baht (about $50 billion) on EEC infrastructure by 2021 to turn seaside industrial zones into sophisticated industrial hubs.

Thai Prime Minister Prayuth Chan-ocha in October celebrates the signing of the contract for a high-speed railway that will link three airports in greater Bangkok and along Thailand's east coast. (Photo by Rie Ishii)

Public-private partnerships, popular in cash-strapped emerging countries, tend to shift the burden of financing risks from the government to businesses. The centerpiece of the EEC is a high-speed railway connecting Don Mueang and Suvarnabhumi airports in the Bangkok area with U-Tapao airport, south of Pattaya. But the project has been plagued by public-private disputes. One year was wasted because the consortium led by Charoen Pokphand Group, the country's largest conglomerate and the winning bidder for the rail project, was at loggerheads with the State Railway of Thailand over land expropriation.

The project came close to crumbling before a formal agreement was reached in late October (bidding took place last November). Construction of the railway is about to begin, with trains expected to start rolling sometime in 2024.

The Thai government expects the EEC to fire up the country's economic engine and to restore the torrid pace of growth that began in the second half of the 1980s and carried well into the 1990s, when the country's gross domestic product was expanding at an average annual clip of around 10%.

The east coast development plan was first floated in the early 1980s. It had two goals -- to nurture exporters and the heavy chemical industry that taps natural gas reserves in the Gulf of Thailand, and to ease the concentration of businesses in Greater Bangkok.

The Thai government asked the World Bank to help finance the development, but the international lender was reluctant, saying the plan lacked "economic rationality."

Japan then came to the rescue. Tokyo provided 178.8 billion yen ($1.6 billion at current rates) in yen loans in the 12 years from fiscal 1982, bankrolling ports, roads, waterworks and industrial parks -- 16 projects in all.

The amount of money Japan supplied looks puny compared to the EEC investment, which is more than 32 times what Japan provided decades ago. But given the price levels in Thailand at that time, the amount was "worth five to 10 times" its value of today, according to Shinya Ejima, a former senior vice president of the Japan International Cooperation Agency who was involved in the economic assistance to Thailand three decades ago.

"Japan had never provided such a large amount of economic aid for a specific area in such a short period of time," Ejima said.

The development project quickly turned fishing villages with white sandy beaches and palm trees into industrial hubs. Until then, a car trip from Bangkok to the region took half a day, a journey that also put the taker at the risk of muggings once the sun went down. But a new highway has shortened the travel time from Bangkok to the eastern seaside to two hours.

Luck favored Japan in this endeavor. The yen loans were not necessarily aimed at helping Japanese companies expand into Thailand, according to Ejima. As it happened, however, Thailand's industrial development coincided with Japan Inc.'s rush to expand overseas after the 1985 Plaza Accord, which strengthened the yen against the dollar.

Thailand was in a strong position to attract Japanese investment, geographically and politically. It sits at the center of Asia and at the time enjoyed exceptional political stability under the long rule of Prime Minister Prem Tinsulanonda, who had the confidence of King Bhumibol Adulyadej. Many of the estimated 5,500 Japanese companies operating in Thailand today have manufacturing facilities in the eastern seaside region.

Thailand's remarkable economic expansion, which started in 1987, was a success story partly written by Japan's public and private sectors.

A view of central Bangkok: Inequality between Thailand's urban and rural areas has long lingered behind Thailand's political confrontations. (Photo by Rie Ishii)

Three decades on, Thailand is looking to China for money to re-energize its economy. The government is trying to entice Chinese tech giants like Alibaba Group to invest in the EEC. And it's efforts have received a boost from China's trade war with the U.S., which is prompting many international companies to shift production out of China to avoid Washington's tariffs.

But the EEC is unlikely to provide as powerful a kick to Thailand's economic growth as the seaside development project three decades ago due to crucial changes in the economic environment.

The biggest challenge facing the Thai economy of the 1980s was a lack of jobs in export industries. The eastern seaboard development project played a pivotal role in boosting industries that went on to become major employers.

According to the National Statistical Office of Thailand, the three eastern provinces saw their combined population grow at an average annual rate of 2.5% during the 1986-1991 period, well above the national average of 1.5%. This miniboom was fed by employers offering jobs. But the bigger part of the story was this: The job openings and economic growth were benefiting rural areas.

Today, despite suffering from an economic slowdown, Thailand's unemployment rate remains below 1%.

Thailand's total fertility rate -- the total number of children born to a woman in her lifetime -- was 1.53 in 2017. That put Thailand 160th among 187 countries and not much higher than Japan's 1.43. Thailand is aging faster than most Asian emerging nations.

The graying of Thai society makes the EEC project and all the upgrades it promises all the more important. But most of the jobs it will create will have to go to foreigners, and Thailand's labor crunch will inevitably limit the trickle-down effects in rural economies.

In short, the EEC program, even if it succeeds, will not reinvigorate the Thai economy as a whole.

In 2017, Rayong Province outperformed all the other prefectures economically. Its per capita GDP, 1.09 million baht, was the highest in the kingdom. The northeastern province of Nong Bua Lam Phu was the poorest, with per capita GDP of 53,000 baht, one-20th that of Rayong. The disparity among Japanese prefectures is much narrower. On the top, Tokyo's per capita GDP is 110% that of Okinawa Prefecture, at the bottom.

The bitter political battle between the camp that supports former Prime Minister Thaksin Shinawatra and the rest of the nation has led to two military coups already this century, in 2006 and 2014. It is an acrimonious, deep-rooted political feud, partly fed by serious economic inequality, much of it between urban and rural areas.

The EEC will only widen the gap and deepen the divide. The choice between growth and redistribution, part of the hotly debated global argument regarding the upsides and downsides of globalization, is crystallized in Thailand's EEC project.

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