3. Making the most of international trade in services to achieve future economic prosperity

The importance of the services sector in Thailand has increased along with the rise of its income level. Economic development is associated with the expansion of the service economy. Thailand’s economic growth has followed this typical pattern (Figure 3.1). As industrialisation took hold, the share of the agriculture sector in the economy decreased throughout the second half of the 20th century, while the share of the manufacturing sector in GDP increased. Since the late 1980s, post-industrialisation evolved in Thailand together with rapid income growth led by structural reforms and a foreign investment boom in the wake of the Plaza Accord. The services sector’s share of value added and employment started to increase (Figure 3.1, Figure 3.2), while the share of the manufacturing sector flattened. After a slight decline in the mid-2010s, the services sector’s share in GDP increased again and it reached its highest level in 2018. This contrasts with the declining GDP share of the manufacturing sector, which peaked in 2010. Activity, measured by value added in the volume terms, has expanded more rapidly in services than in manufacturing, particularly after 2010 (Figure 3.2).

Reflecting the increase in the country’s standards of living, the demand for services has also expanded. Households purchase more services, such as leisure, or outsource household chores as their incomes grow. In Thailand, the shares of “restaurants and hotels” and “recreation and culture” in household consumption expenditure increased from 19% to 27% between 2000 and 2018. Rapid urbanisation has enhanced this trend (Asian Development Bank, 2012[1]). The growing number of foreign tourists has also created strong demand for these services. In addition, firms in developed economies tend to purchase business services as intermediate input, such as financial services and information services, to satisfy their customers’ needs and to improve their products. In Thailand, the share of “financial and insurance activities” in GDP increased from 4% to 8% between 2000 and 2018, which shows that, along with its economic development, more sophisticated business services sectors have been growing fast. Nevertheless, despite its increasing presence, the services sectors’ productivity shows a mixed picture. The productivity level of some services sectors, which embrace a high share of employment, such as the hospitality and restaurant industry (a quarter of the total employment) is lower than that of others, while high-productivity business services employ a smaller share of workers (see Chapter 1). Lifting the productivity level of the former sectors while stimulating job creation in the latter is therefore essential to improve overall productivity level, but this also calls for a new policy focus to foster the development of novel services sectors that can drive higher productivity growth in the long run in Thailand.

Despite its fast increase, the services sector is still smaller in Thailand than in most OECD countries (Figure 3.3). The services sector is therefore expected to continue expanding in the future. A simple assumption suggests that its share in GDP could reach approximately 70% (i.e. 10 percentage points higher than the current level) when GDP per capita reaches the OECD average. The expansion of the sector is likely to accelerate as Thailand approaches the high-income status, as previously happened in other countries (Asian Development Bank, 2012[1]), (Park and Shin, 2012[2]) , (Eichengreen and Gupta, 2009[3]). However, this may be a lower bound. New technologies – such as digitalisation, artificial intelligence, and blockchain – offer new opportunities for the services sector, and could make it an even more important driver of Thailand’s economic growth than is currently expected (Box 3.1). In fact, the usage of digital technologies – from teleworking to telemedicine – has spiked globally due to a historic pandemic of COVID-19 starting from early 2020. While efforts to contain the virus continue around the world, this new development would accelerate even further and become enduring after the pandemic, including in Thailand.

Services, which are conventionally viewed as less tradable, are now frequently traded across national borders. Although less vigorously than trade in goods, Thailand’s international trade in services has increased along with the expansion of its GDP, and its services trade share in GDP is now comparable to other regional peers and larger than in OECD countries (Figure 3.5). Particularly, inbound tourism constitutes a considerable part of Thailand’s services exports, as the country is one of the most popular destinations. The number of tourists, particularly from China, grew rapidly recently, though it has plummeted since early 2020 due to the COVID-19 outbreak abroad.

The development of Global Value Chains (GVCs) accentuates the growing trade in services. As GVCs intensify trade in intermediate goods, they also increase cross-border transactions of associated intermediate services, such as logistics. The COVID-19 pandemic has revealed some vulnerabilities of GVCs, such as stretched value chains and lean stock management. However, the strengthening of GVCs would not reduce the importance of these associated services trade, but rather increase it, as value chains would need to become more diverse and redundant.

Moreover, as modern manufacturing requires more services input, such as marketing, industrial design and information services, more services are embodied in intermediate and final goods. Although many goods that embody services are crossing borders in GVCs, these services are not captured in conventional trade statistics. According to the OECD Trade in Value Added Database, which can capture embodied products and services in trade, services have a much larger share than gross services exports if these embodied services are taken into account (Figure 3.6). The emerging pattern of services is more significant in value-added terms, which deduct imported services, than in gross terms that include imported services used to produce exporting products.

The dynamism of Thailand’s services sector needs to be boosted further. The manufacturing sector, which has actively participated in international trade, has been the main driver of growth of Thailand. However, this goods-exporting economic development model may have matured. As Thailand is becoming a high-income country, its cost competitiveness is getting eroded (Figure 3.7). Regional competition on product quality has become more significant because of technological progress made in neighbouring countries, such as China and Viet Nam. Manufacturing needs to further improve its products and production processes by using highly advanced technologies to compete in international markets. Besides, as modern manufacturing products are associated with unbundled services contents that are provided separately, such as maintenance and customer services, more trade in goods goes hand in hand with more trade in services. This will provide Thai firms tremendous business opportunities.

Moreover, as advanced manufacturers conduct core services businesses required in upstream and downstream production processes, such as information and distribution services, by themselves, the nature of manufacturing is changing. These developments call for policies shedding more light on the service economy. Nevertheless, the rise of services does not itself guarantee economic prosperity in the future. The productivity levels of some services sectors are lower than that of manufacturing in Thailand (see Chapter 1) (Noland, Park and Estrada, 2012[4]). In addition, the competitive edge of some high-end business services – namely, IT and information, and other business services, the latter of which includes professional services – is rather weak in Thailand, which needs to be enhanced (see Annex 3.B).

Strengthening export-oriented services sectors would also help economic growth of Thailand be more resilient. During the past crises, Thailand’s services trade was more stable but less vigorous than its merchandise trade. Nevertheless, inbound tourism, where Thailand has a competitive edge, contributed a lot to a strong economic recovery from the 2011 floods (Figure 3.8). Nurturing newly evolving services sectors would help expand Thailand’s export markets, and thus would make its exports more robust (see Annex 3.C). Given the accelerating digitalisation, strengthening the export competitiveness of high-end business services sectors would be crucial. In addition to its strong commitment to international trade, thanks to a wide range of exports products from agriculture to manufacturing goods, Thailand’s exports consist of an extensive coverage of products and are more distributed compared with regional peers (Figure 3.9). Developing new and competitive services exports would further strengthen its export diversification.

As more services are crossing borders, Thailand could consider more services market reforms in the context of globalisation. However, policy for trade in services should focus not only on cross-border trade but also on the functioning of domestic markets, since services are provided through a range of modes, such as foreign affiliates or foreign workers in Thailand (Box 3.2). For example, foreign affiliates can act as suppliers of more sophisticated services to the Thai manufacturing and consumers, expanding the services sectors in Thailand thus also benefiting Thailand’s domestic economy. Estimates suggest that the services provided in Thailand are important contributors to productivity of manufacturing (see Annex 3.D). Ameliorating services quality needs the overall reforms in services markets. Particularly, the following four areas are most relevant to Thailand.

  • Opening the services markets more to foreign firms and workers;

  • Developing more service-oriented Preferential Trade Agreements (PTAs);

  • Nurturing high-end business services, such as information and professional services;

  • Improving the quality of consumer services, such as tourism and higher education.

Reforming the services sector would also benefit the Thai consumers. Throughout the last two decades, the share of services in total household consumption has declined despite their increasing volume. As consumer services, such as retail trade and leisure, are more geared to domestic demand, particularly towards household consumption, this would also help rebalance economic growth to a more stable and durable path amid the looming ageing society. In an ageing society, elderly people may purchase different types of services compared to younger people: in addition to health-related services, demand for leisure with high value-added would increase. If elderly people decide to participate in the labour market more actively, education services might be more consumed than now for re- and up-skilling.

Due to the global pandemic of COVID-19, a number of countries including Thailand have imposed border restrictions to ban the entry of foreign visitors. However, as a wide range of services trades is associated with the cross-border mobility of people (e.g. experts are dispatched to a host country to set up a new factory or to renew equipment), it would be also essential to keep the country open to abroad, while containing the resurgence of virus infections.

The OECD Services Trade Restrictiveness Index (STRI), which is newly available for Thailand, provides a landscape of regulatory openness in 22 business services sectors (Box 3.3). The index suggests that, overall, Thailand is less open to the delivery of foreign services compared with OECD countries, China and Malaysia, while less restrictive than Indonesia and India (Figure 3.10). Rail freight transport, accounting services and insurance services are the three sectors with the highest score relative to the averages of other countries (OECD, 2020[5]). Besides, the restricted sectors in Thailand are likely to be less competitive in international trade (Figure 3.11). A further opening of the markets would not only boost productivity and improve export performance through enhanced resource allocation, but also provide the long-run dynamic gains by facilitating knowledge transfer and innovation, which are more crucial for Thailand’s economic achievement (Box 3.4). Competition and regulatory reforms would also invigorate domestic services sectors. The OECD’s Competition Assessment Toolkit (CAT) identifies potential competition barriers in the Thai logistics sector (OECD, 2020[6]) (Box 3.5).

Facilitating the cross-border movement of skilled workers is an important element in services trade. Foreign investment entails expert visits, and professional services are often provided with close proximity. As these services tend to be more skill-intensive, this is particularly relevant to Thailand, given the shortages of skilled labour (see Chapter 2).

Thailand has a range of restrictions on the movement of foreign workers. A company is entitled to hire up to ten foreign workers at a ratio of THB 3 million in capital per foreign worker. The rule of 4:1 ratio of local and foreign employees on a full-time basis is applied, although exemptions exist, subject to approval by the Board of Investment (BOI) and joint ventures with major Thai shareholders. Thailand also applies labour market tests and the duration of stay is limited to 12 months: the ability to compete and the opportunity to work for Thai nationals need to be considered prior to issuance of work permit for foreigners. Besides, foreigners have to notify their current addresses every 90 days. Given the importance of the issue, the BOI can expedite immigration process of skilled foreign workers. With the Smart Visa procedure, foreign skilled workers earning more than THB 200 000 per month are exempted from some restrictions, including a four-year stay instead of a general one-year stay. As the Smart Visa only covers the targeted industries, this could be expanded further to other fields.

In March 2019, the Thai Immigration Bureau announced the enforcement of the “Notification of Residence of Foreigners” (TM30) rule under the longstanding Immigration Act, B.E. 2522 (1979) due to security reasons. This requires property owners to report all foreigners who stay overnight on their premises within 24 hours. Foreigners who fail to provide an official receipt for TM30 compliance will not be eligible to apply for visa extensions. The government has been reviewing the rule under the on-going regulatory reform, and the restrictions have been partially relaxed. From June 2020, if the foreigner returns to the same premises after a temporary leave, the property owners no longer need to file the report once again with an immigration office. Nevertheless, as the extra reporting of TM30 constitutes an additional burden for foreign firms to extend their businesses in Thailand, this could be further streamlined.

Moreover, ASEAN has developed Mutual Recognition Arrangements (MRAs) for skilled labour mobility within the region since 2005, which now cover seven different professional occupations. So far, the number of registered professionals is limited; in case of engineers, only 3 735 were registered as of 2019, of which 220 from Thailand, probably due to differences in languages and strong family ties in Asian countries. Nevertheless, Thailand could attract engineers from other ASEAN countries because of a wage premium for engineers (Asian Development Bank, 2019[7]). Adding more professions, particularly other high skilled vocational occupations, to these agreements would be useful (Asian Development Bank, 2019[7]).

While the manufacturing sector has a dominant share in inward FDI, the services sector also has a significant share, particularly the financial sector (mostly in the form of mergers and acquisitions), the real estate sector, and the wholesale and retail trade sectors (Figure 3.12). Nevertheless, with Cambodia, Laos, Myanmar and Viet Nam (the CLMV countries) having considerably increased their inward FDI flows over the past decade, Thailand needs to restore its attractiveness as an FDI destination, particularly in services sectors.

The OECD FDI Restrictiveness Index suggests that, despite past policy efforts, Thailand’s FDI restrictions are no longer the lowest in the region as they used to be, because regional peers have opened their markets drastically (Figure 3.13). Moreover, Thailand tends to be stricter in services sectors. Thailand imposes minimum capital requirements on foreign investment (THB 2 million in general), which is quite high compare with other emerging economies. The Foreign Business Act B.E.2542 (1999) is the main law governing FDI and defining foreign ownership, which is a 50% or more foreign shareholding. The law restricts foreign access to certain businesses for security reasons (List 2: such as domestic transport including railways) and the promotion of domestic firms (List 3: 21 sectors, mostly services). The BOI has the power to grant permission of full foreign ownership of firms in these sectors, as long as other laws do not state restrictions. Nevertheless, these rules generate uncertainty and risk rent-seeking behaviour by incumbents. Reviewing these rules, in view of lower thresholds and a negative list, actually narrowing down the list of sectors and activities in which foreign investors are treated in a discriminatory manner, would likely spur foreign investment in services sectors (OECD, 2020[9]).

Because trade in goods and services are more intertwined than ever, trade barriers to both must be addressed in a coherent manner. Particularly, due to the increasing importance of embodied services, manufacturing exports will benefited from services trade liberalisation. Moreover, as trade liberalisation in goods has progressed more than that of services within ASEAN and beyond, advancing the latter becomes more crucial and its gains would be larger. Thailand could therefore reap benefits from the engagement with more service-oriented Preferential Trade Agreements (PTAs). Particularly, if PTAs contained ambitious liberalisation objectives for services markets, which go beyond the current commitments, this would enhance competition and facilitate reforms in domestic markets. PTAs, such as, the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) that contain progressive regulatory reforms “behind the borders” would boost Thailand’s economic growth. For example, under the framework of the Association of South-East Asian Nations (ASEAN), the members are pursuing trade integration, which embraces services trade liberalisation including the facilitation of skilled labour mobility (The ASEAN Secretariat, 2015[10]). In its services element, the ASEAN Framework Agreement on Services, Thailand relaxed the restrictions on the number of foreign workers in the banking sector beyond the GATS commitments with regard to workers from the ASEAN countries (ASEAN, 2019[11]).

OECD simulations suggest that Thailand could reap larger gains from PTAs with services trade liberalisation compared with trade liberalisation on goods. The OECD METRO model has been used to estimate the impact of a stylised PTA on Thailand (Box 3.6). A simulation of four scenarios – tariff reduction on goods, reduction of trade costs related to non-tariff measures on goods, services liberalisation, and simultaneous implementation of the three types of measures – shows that the GDP increase is the largest for services trade liberalisation. This stems both from the relatively large direct share of services sectors in the economy and from the fact that manufactured products have a high content of embodied services. The estimation also suggests that the gains from trade liberalisation including both goods and services would be the largest. As the model does not consider the effects of services trade liberalisation on FDI, productivity growth and the movement of skilled workers, including the long-run dynamic effects, it is likely to be a lower-bound estimate and the actual benefits could be larger.

Since the logistics service has become an essential element in international trade, trade facilitation, such as border management, is now an important policy tool to achieve smoother trade in general (OECD, 2018[12]). As trade facilitation implementation reduces transaction costs for SMEs, it is also helpful for SMEs to connect to international markets. Thailand’s scores in the OECD Trade Facilitation Indicators are better than the average of Asia-Pacific, although a gap remains with best practice countries (Figure 3.16). Since the mid-2010s, the government has taken a couple of measures to reduce the number of documents and improve transparency. Nevertheless, the two weakest performing areas, the transparency and proportionality of fees and inter-agency co-operation have barely improved. As was recommended by the UNCTAD (UNCTAD, 2014[13]), Thailand established a high-level committee to facilitate inter-agency co-operation. Further improvement in functioning, financing and sustainability of the committee would help address remaining shortcomings in both the policy areas (International Trade Centre, 2015[14]).

High value-added services for businesses now play essential roles in the economy: notably, IT and information services, and professional services, the latter of which includes design, consultancy, advertisement, marketing, scientific research and engineering, among others. Nurturing these services to expand into overseas markets would therefore be an important policy agenda for Thailand.

Developing high-end business services is crucial to restore competitiveness of the Thai manufacturing sector, which has weakened recently (see Annex 3.B). Estimates using the OECD TiVA Database reveal that these services contents are already embodied in intermediate goods when they are shipped to Thailand (Figure 3.17). This indicates that the Thai domestic service suppliers cannot deeply integrate in GVCs, because their services are not sufficiently sophisticated to match the needs of export-oriented manufacturers.

Seizing the opportunity borne by FDI is one of the most effective ways to enhance the GVC participation of domestic suppliers in high-end business services. Particularly, domestic suppliers can advance their knowledge and technologies through direct contracts with foreign affiliates. Some emerging countries have succeeded in strengthening this linkage (Figure 3.18). However, not all suppliers meet standards required by foreign affiliates, and both sides do not know the potential needs and services provision each other. While encouraging foreign affiliates to purchase more from domestic suppliers proves less effective, levelling up domestic suppliers’ capacity and addressing information asymmetry between the both sides are useful. Although not confined to the services sector, RROCOMER, Costa Rica’s trade promotion agency, helps domestic suppliers develop their skills and capacity including market research, while making co-operation among public institutions more efficient. Likewise, Chile has conducted a Suppliers Development Program since the late 1990s, which provides financial incentives for foreign affiliates to train domestic suppliers.

Thailand could expand direct exports of high-end business services, including IT and information services, and professional services. Although the share in overall exports is still small, these direct exports have been expanding rapidly, contrary to the embodied exports of the same services (Figure 3.19). As Thai enterprises, such as in manufacturing and financial services, are extending their businesses more actively in neighbouring countries, demand for high-end business services provided by Thai suppliers including marketing and maintenance would increase further. Strengthening these Thai services suppliers would also be conducive to their participation in GVCs.

Countries are grappling with policy development that can stimulate service innovation. As these services could also be provided by non-service sectors, the government would need to prepare an economy-wide enabling environment for innovation rather than focusing on specific services sectors. Regulatory reforms would help promote new services (OECD, 2018[15]). In Thailand, regulatory sandboxes have been introduced to facilitate innovation and technology advancement in the services sector, including the one for financial services starting in 2016, which has resulted in the flourishing Fintech sector (see Chapter 1). Moreover, stimulating business investment in R&D is still essential. Nevertheless, compared with traditional manufacturing, where in-house R&D-driven innovation in products is relevant, other types of innovation are deemed more important for these service activities: namely, innovation in process, market and organisation. As the sectors are more data-driven and knowledge-intensive, encouraging investment in ICT and intangible assets would also be essential (Uppenberg and Strauss, 2010[16]). Public investment in digital infrastructure would expedite this development (see Chapter 1). Besides, promoting corporate branding like in Korea, which helps private companies sophisticate their brands including those for exports, would encourage these innovative processes, particularly among SMEs.

Accelerating the digital economy more broadly is also crucial. This is particularly the case for knowledge-intensive services, such as marketing, research and design. Protection of Intellectual Property Rights (IPR), including non-technical innovation, must be a key policy priority (see Chapter 1). Besides, as recent developments in IT services are more consumer-oriented, protection of personal data is also essential. Thailand is making progress in this area. Under the new Personal Data Protection Act 2019, although its implementation is delayed due to the COVID-19 outbreak, it is not allowed to forward or transfer personal data to a third party unless the data subject has given their written consent. Moreover, the transfer of personal data to foreign countries is possible only if the receiving party has similar personal information protection standards.

Consumption by foreign customers in a country, such as inbound tourism and education, is essential part of trade in services (Box 3.2). Particularly, the increasing number of outbound tourists, at more than 4% growth per year for the last two decades, provided tremendous economic opportunities to competitive countries in tourism, including Thailand, though severely affected by the global COVID-19 pandemic. Since domestic residents are major consumers of these services, improving the quality of the services will have economy-wide impacts and be beneficial to the Thai people as well.

The tourism industry is a major export sector for Thailand. Thanks to its rich nature, unique culture and high hospitality, Thailand is one of the most popular tourist destinations in the world (Figure 3.20). English is mostly usable in major tourist spots, and medical tourism is one of Thailand’s competitive edges. Tourism exports, i.e. consumption by non-resident, account for 11% of GDP in 2018, much higher than those of regional peers.

Nevertheless, the Thai tourism industry needs to transform itself into a more productive and high quality services sector to sustain its competitiveness. Even before the global COVID-19 pandemic, the industry was aiming for a higher value-added sector, which provides tourists with unique and vernacular experiences, rather than merely a sector of mass services provision with budget prices and low productivity, such as lodging and meal services. Thailand’s second comprehensive National Tourism Development Plan 2017-2021 has sought to support the sustainable growth of tourism by strengthening its brand and safety. As uncertainty is high about the future course of the pandemic and its long-term impacts on people’s behaviour, transforming the tourism industry is now more urgent. A number of countries are grappling with the sector’s medium- and long-term resilient recovery beyond short-term mitigation and rehabilitation, stressing the importance of sustainable tourism and digitalisation (OECD, 2020[17]), which Thailand is also pursuing (The Tourism Authority of Thailand, 2020[18]).

As small- and medium-sized enterprises are predominant in the tourism industry, encouraging digitalisation of the sector as a whole could improve its productive capacity through connecting a wider range of consumers and suppliers. Particularly, since the broadband penetration rate is still low in Thailand (15% of population in 2020, Office of National Broadcasting and Telecommunications Commission), potential benefits of digitalisation would be large in rural areas. Facilitating digitalisation would also be conducive to broader sustainability development by improving the industry’s overall efficiency and helping manage environmental burdens stemming from tourist activities, such as by through time-ticketed entry (OECD, 2020[19]). For example, a number of districts in the EU countries use digital tools to analyse demand, deliver services to targeted groups, and manage tourist flows (European Commission, 2020[20]). In addition to the infrastructure development, nurturing digital skills among rural areas and SMEs could also be prioritised.

Although endowed with rich natural environment and cultural heritages, Thailand needs to preserve these tourism resources to maintain and even further boost its attractiveness as a tourist destination, while reducing environmental burdens (Figure 3.21). Since 2018, Thailand has restricted visitors’ entry to Maya Bay to restore its coral ecosystem damaged by excessive tourism activities. A number of countries have introduced economic tools or direct measures to conserve tourist sites. The post-COVID-19 recovery would be an important opportunity to take away from mass tourism to this direction, by utilising user fees to manage congestion and environmental pressure, such as dynamic pricing, or limiting the number of visitors in the long run.

The need to enhancing the industry’s sustainability capacity also calls for a more comprehensive community-based strategy that involves a wider range of stakeholders and coordinates with other socio-economic policy measures, as tourism development would entail conflicts of interest within and outside of local communities. For example, air pollution caused by open burning of sugar cane farming is considered as a concern for Si Thep, an ancient town in the central highland, which Thailand nominates on its tentative list to the UNESCO World Heritages. Moreover, protecting heritage sites from natural disasters also requires local communities’ involvement as protection measures should be part of the community’s overall disaster-risk-reduction strategy. Thailand has a long history of community-based tourism. It aims at facilitating co-operative tourism development in villages, and aims for broader distribution of tourism revenue. Nevertheless, not all households have access to business opportunities, as some activities, such as rafting and homestay, require a large sum of initial investment. Partial co-operation in rural communities and poor financial conditions result in deterioration of tourism resources, which are public goods, in these communities. In some OECD countries, recently, more emphasis is given to management and promotion of local destinations, particularly through the creation of Destination Management Organisations (DMOs) which are formally constituted to deliver local tourism benefits with the involvement of the private sector. Strengthening the function of the community-based tourism, with strong support for local governments would help maintain and restore local tourism resources, while achieving a more equitable distribution of the economic gains. In this regard, the broader environment of local areas should be treated as “common” tourism resources, which is an essential element of high quality destinations. Given that local governments are responsible for water and waste management, these matters would be well integrated with a locally driven tourism development strategy.

Tourism activities in Thailand show strong seasonality, and the length of stay is shorter than in other competing countries: 9.55 days in 2015, while 26 days in Australia and 18 days in the United States. Since tourists tend to spend more and stay longer for cultural and artistic purposes irrespective of season, a number of countries stress the importance of these types of tourism to seek for new market opportunities. For example, New Zealand highlights arts and culture as core priorities for sustainable tourism growth (Creative New Zealand, 2019[21]). Further strengthening culture- and art-based tourism would also help the industry to diversify its demand and to become a higher value-added sector, creating more skilled jobs. Digitalisation would help equip the tourism industry with more innovative capacity. For example, West of England in the United Kingdom has experimented 5G technology to provide more interactive information on cultural sites to tourists, using some advanced technologies, including Augmented Reality (AR) and Virtual Reality (VR). Besides, medical tourism, where Thailand has a competitive edge, could be strengthened further on condition that a high level of universal services to the Thai people is maintained. While a well-managed outbreak containment would furnish its healthcare system with a high reputation, the accelerating digitalisation could also provide new market opportunities abroad.

In Thailand, the bulk of tourists concentrate in a few areas, notably Bangkok and the South. Since ground and port infrastructure is deemed as one of the weaknesses in the Thai tourism sector (Figure 3.21), improving transportation infrastructure and services would contribute to better connections of potential tourist spots and stimulate the local economy, while reducing environmental burdens caused by over-tourism. Moreover, the gateway of international tourist arrival is concentrated in Bangkok. This bottleneck could be addressed by a railway network connecting U-Tapao International airport in the Eastern Economic Corridor and Bangkok.

Expanding international student enrolment in higher educational institutions would benefit the overall economy, by attracting global talents, improving research and education output and nurturing innovative environment through diversification. Moreover, longer-term business and trade links are also expected to occur as a result of hosting international students (Evennett, 2018[22]). In Asia and its surrounding regions, a number of countries seek to become a global hub of higher education. Considering the intensified competition in connecting global talents, making Thailand’s higher education more attractive to foreign students would also benefit Thai students. As safety concerns caused by the COVID-19 pandemic would affect students’ destination choices, it would be a good opportunity for newcomers, such as Thailand, to consider the internationalisation of the education system.

International rankings of Thai universities are not high and the number of foreign students in higher education is small compared with neighbouring peers (Figure 3.22), such as Malaysia and Singapore, although tuition fees are less expensive for public universities and programmes are taught in English since the early 2000s. To attract foreign students, a range of policy measures should be appropriately coordinated, including student visas, grants and scholarships, high-quality curriculums and an enabling research environment. Therefore, a number of countries, notably Australia, New Zealand and Malaysia, have developed a comprehensive strategy to strengthen synergies among different policies, while explaining the benefits of accepting foreign students to the public. Aiming for a regional education hub in ASEAN, Thailand supports international student mobility in the region. Nevertheless, a further emphasis could be given to the internationalisation of higher education beyond the ASEAN region. To this end, the government has already sought for collaboration with the EU.

In addition to establishing join or dual degree programmes with foreign universities, supporting foreign universities to open branch campuses within the country is one way to attract foreign students. A number of economies, who host international branch campuses, have succeeded in inviting foreign universities with a high global reputation. This would push up the overall quality of the host economy’s education. Dubai has used international branch campuses as a tool to attract skilled foreign workers. Malaysia has encouraged the establishment of international branch campuses in the country since the mid-1990s with the aim of becoming the knowledge-based economy and preventing the persistent brain drains. Other Asian countries, such as Viet Nam and Indonesia also moved to this direction recently. In Thailand, under the Foreign Business Act B.E. 2542 (1999), foreign owned or foreign majority entities can set up a branch campus subject to the approval of the Foreign Business Commission. Moreover, since 2017, the government has encouraged reputed overseas universities to set up international branch campuses of the targeted fields in the Eastern Economic Corridor (EEC) area. A wide range of incentives is provided, such as exemptions to foreign ownership of land and the relaxation of visa requirements for overseas staffs. Three foreign universities have already obtained approval. Although it would require full-fledged reforms amid the declining number of students, depending on the outcome evaluation of the current scheme, the government could consider the extension of the scheme beyond the EEC area. Foreign teachers working in the strategic fields outside the EEC area can also apply for the streamlined visa procedure. To facilitate internationalisation of higher education, this could be extended to other disciplines.

Trade integration induces the shift in production activities among sectors in a country, which results in job displacement and wage adjustment. Therefore, governments need to take policy measures that enable workers to move between the sectors without frictions (OECD, 2018[23]). Moreover, as GVCs are highly developed in Thailand, employment in supporting business services that contribute to the production of manufacturing products is significant. This requires more policy focus on skills development required in these services sectors, in addition to the mitigation policies against labour adjustment.

To facilitate the transformation to a more service-driven economy, policy measures should support the re- and up-skilling of workers and the mobility of workers to skill-intensive service jobs. Empirical work suggests that, although the number of workers with higher education attainment has increased, Thailand faces substantial skills shortages and surpluses, with a significant degree of mismatch (see Chapter 2). Trade liberalisation would boost demand of business services in Thailand, benefiting highly skilled workers including those who are over-qualified. However, to maximise the benefits of services trade integration, Thailand needs to step up policies to re- and up-skill workers and make the labour market more flexible. This could address the skills shortages and mismatches effectively. Particularly, given the significant regional disparities and a large share of agriculture employment in Thailand, facilitating labour force adjustment among different sectors and occupations is crucial.

OECD simulations suggest that participation in PTAs with services trade liberalisation would increase the demand for high skilled workers in the Thai services sectors. The OECD METRO model, which can distinguish five different skills, has been used to estimate the impact of PTAs on sectoral labour demand and on different skills levels (see Annex 3.E). A PTA containing services trade liberalisation increases the demand for mid-skilled jobs, such as clerks, in the business-related services sectors, except for the financial and professional service sectors, which reduce production due to increased imports. Moreover, PTAs that embrace trade liberalisation in goods, both by reducing tariffs and non-tariff barriers, would be likely to increase the demand for high skilled jobs, namely, office management and professionals, and technical and assistant professionals, in a broad range of services sectors (see Annex 3.E). This is because the manufacturing firms that would benefit from a liberalisation of trade in goods require more services input produced by high skilled workers. On the other hand, the demand for lower skilled workers is most likely to decline in services sectors in response to goods trade liberalisation. As the OECD METRO model does not take into account the impact of trade liberalisation on FDI, productivity growth and the movement of skilled workers, including the long-run dynamic effects, the estimates are likely be a lower bound of the actual impact.

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To estimate Thailand’s services share in GDP, similar calculations to (Park and Shin, 2012[2]) and (Eichengreen and Gupta, 2009[3]) were conducted for this report.

A quartic relationship between per capita income and the value-added services share is assumed to capture the two waves of services growth. By using the panel data for 155 economies between 1995 and 2018 derived from the World Bank Development Indicators Database, OLS regressions are estimated.

Different from the previous research, the results show negative coefficients for cube items and positive coefficients for quartic items (Table Annex 1.A.1), which suggests that the estimations might capture the growing share of new services sectors, such as digital services, in high-income countries. As it is impossible for the services share to keep increasing, the current situation is considered as a transitional period. (Eichengreen and Gupta, 2009[3]) conducted regressions on disaggregated services sectors. Their estimation result also shows that the share of high-end services in GDP, notably computer, legal, technical and advertising, financial intermediation, other business services, and post and telecommunications, increases over the entire range of middle- and high-income levels, and particularly rapidly at high income levels, with no sign of growing more slowly at the high end.

Based on the estimation result of the quartic relationship, Thailand’s services share would be 68.5% if the per capita income of the OECD average in 2018 is applied, which is slightly higher than the calculation based on the linear relationship, 67.8%.

The Revealed Comparative Advantage (RCA) is an indicator to analyse an industry’s comparative advantage of a given country in international trade under the assumption that the market is sufficiently competitive. If a country’s industry has a comparative advantage, an RCA index is above one.

The traditional RCA in terms of gross exports is calculated as the share of a country’s exports of a product in total exports divided by the share of world exports of the same product in total world exports. However, as the gross exports of a product include intermediate input imported from other countries, the RCA in terms of gross exports is not an accurate indicator to assess a country’s competitive edge in the context of GVCs.

The OECD Trade in Value Added (TiVA) Database can capture the value added created by each country’s industry in the fragmented production processes. By using this database, two alternative RCAs were calculated for this report to evaluate Thai industry’s competitiveness in GVCs.

As more business services are used as intermediate input of manufacturing, to evaluate the comparative advantage of a given service sector, all exported services either directly or indirectly (i.e. embodied in manufacturing goods) should be taken into account, while deducting imported services (Miroudot and Cadestin, 2017[24]).

The RCA in the value-added terms is calculated as the share of value added originating from a given service sector in a country’s exports divided by the share of value-added originating from this service sector of all economies in world exports. Similar to the RCA in the gross export terms, a country’s industry has a comparative advantage, when an RCA index is above one.

Estimates of the RCA in terms of value added suggest that Thailand has a comparative advantage in basic business services (wholesale and retail trade, financial, and telecommunications services) and tourism-related services (real estate activities, and accommodation and food services). However, it does not have a comparative advantage in transportation and storage (including logistics) and high-end business services (IT and information, and other business services including professional services) (Figure Annex 1.B.1).

On the flip side of a coin, manufacturing products now contain a lot of services input. Therefore, a comparative advantage indicator needs to consider all domestic value added (“GVC income”) embodied in a given sector’s final products (i.e. final demand in a given country or exports). This includes value added generated by supporting industries within a country, but excludes imported value added.

The RCA is defined as the share of domestic value-added contents of a sector’s final products in a given economy’s total value added as compared to the average share in all economies (Timmer et al., 2013[25]). For example, as for automobile products, it looks at the share of value added in a given country as compared to the average share contributed by all economies. Similar to the RCA in the gross export terms, a country’s industry has a comparative advantage, when an RCA index is above one.

Estimates of the RCAs in terms of GVC income suggest that the Thai manufacturing still maintains its competitive edge, but it is deteriorating except for the food processing industry (Figure Annex 1.B.1). The material industry does not have a comparative advantage.

To estimate how diversification and trade openness could affect the recovery of a country’s exports from shocks, simple calculations were conducted with regard to the export performance of the OECD countries and some emerging economies during the Global Financial Crisis (GFC).

The recovery length (the number of periods from the trough to the time when export volume restored the pre-crisis peak) and the depth (the ratio between the pre-crisis peak export volume and the trough) were measured for each economy. For export diversification, the Export Diversification Index (IMF) and the HH market concentration index (World Bank) were utilised. The former captures a country’s export diversity in products and partners and the latter captures the diversity in trade partners only. The both indexes are smaller, if an economy’s exports are more diverse. Trade openness is measured as the share of exports and imports in GDP. By using the data for 53 economies, OLS regressions are estimated.

The estimation suggests that the depth is the main determinant of the recovery length (Table Annex 1.C.1). An exponential relationship between them suggests that the deeper the export drop is, the longer a recovery would be. This is because it would be difficult to restore the previous markets as new competitors emerge, reconstruct more damaged supply chains and recover the previous level of production capacity due to the loss of productive labour and capital. Since the sample size is small, the result needs to be interpreted carefully, but an economy that made efforts to expand its trade openness before the crisis would be likely to recover faster. Diversification of trade partners would also be likely to reduce the recovery length.

Estimates were conducted for this report to analyse the contribution of value chains on productivity of the Thai manufacturing.

In GVCs, manufacturing involves a range of supporting industries, including services, beyond the national boundaries. Productivity calculation that takes into account production processes in value chains, such as outsourcing, captures a more accurate picture of the economy (Dietzenbacher et al., 2012[26]). Extending this framework, recent empirical work suggests that domestic services input contributes to boosting productivity of manufacturing in many countries (Miroudot and Cadestin, 2017[24]).

Instead of focusing on economic activity of a given industry, economic activities of all the industries in Thailand that contribute to produce final products (i.e. domestic final demand and exports) of a given industry are considered. Services provided by foreign affiliates are also included. For example, an automobile consists of parts, software and services, such as design and testing. An alternative labour productivity (“domestic GVC productivity”) is calculated along with these fragmented production processes by using the OECD TiVA Database.

Estimates suggest that domestic GVC productivity of the electrical equipment industry and the automobile industry, which have large supporting industries, grew faster than labour productivity (Figure Annex 1.D.1). Approximately, half of the employment involved in the production of these sectors’ final products are in services sectors.

To investigate the impacts of preferential trade agreements on the labour market in Thailand, particularly demand shifts among five different skill levels, the OECD METRO model has been used for this report. The results from stylised simulation are as follows (Table Annex 1.E.1):

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