Main purpose of the Study - A Study of Anchor Economy: The Case of Thailand

The objectives of this study are:

A. To investigate GDP growth of Thailand and other 5 neighboring countries.

B. To analyses migrant workers at Thailand and other 5 neighboring countries.

C. To study imports - exports between Thailand and other 5 neighboring countries.

D. To offer policy recommendations to government of Thailand.

10 III. Flow Chart

Figure 1.5: Flow Chart of the study

Background Information and Objectives

Literature Reviews Journals and Articles

Research Method

Case Study, Quantitative Analysis, PEST Analysis

Major Finding

Concluding Remarks

11 IV. Expansion of Flow Chart of the Study

A. Introduction Background and object

Summary of the research question, motivations why it is important, list expected outcomes, focus to your research statement, and identify objectives.

B. Reviews of Literatures, Paper of Studied, Analysis in Journals

Survey of what others did, synthesis their work, identify gaps, explain related theory, and position your research.

C. Research Method, Case Study, Historical Method, Quantitative Analysis

Includes variables to measure for Quantitative Analysis, and PEST Analysis.

D. Majors Findings

Used to secondary data on main finding and analysis relate to the study question.

E. Concluding Remarks

Used to confirm the answer to the main study question, reflect on the study process and offer policy recommendations on future study.

Chapter 2 : Review of Literatures

This chapter review literature about classical model of economic growth, basic neoclassical (Solow) model, the economic development, the gravity model, economics and exports-imports of Thailand, Malaysia, Cambodia, Lao PDR, Myanmar, and Vietnam, Thailand’s Border Trade with Neighboring Countries, migrant workers in Thailand, and PEST analysis.

I. Classical Model of Economic Growth

Adam Smith and other classical economists had important contribution on the economic growth theory. Barro and Sala-i-Martin (2003) state that classical economists, such as Adam Smith (1776) provided many of the basic ingredients that appear in modern theories of economic growth. These ideas include the basic approaches of competitive behavior and equilibrium dynamics, the role of diminishing returns and its relation to the accumulation of physical and human capital, the interplay between per capita income and the growth rate of population, the effects of technological progress in the forms of increased specialization of labour and discoveries of new goods and methods of production, and the role of monopoly power as an incentive for technological advance.

Smith (1776) stated that “... But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of

domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it..”

Technological progress could also increase growth overall. Smith's famous thesis that the division of labor (specialization) improves growth was a fundamental argument.

Smith (1776) stated that “ ...this great increase of the quantity of work which, in consequence of the division of labor, the same number of people are capable of performing, is owing to three different circumstances; first to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labor, and enable one man to do the work of many...” Smith also saw improvements in machinery and international trade as engines of growth as they facilitated further specialization. Smith also believed that "division of labor

is limited by the extent of the market" - thus positing an economies of scale argument. As division of labor increases output (increases "the extent of the market") it then induces the possibility of further division and labor and thus further growth. Thus, Smith argued, growth was self-reinforcing as it exhibited increasing returns to scale. Output growth (gY) was driven by population growth (gL), investment (gK) and land growth (gN) and increases in overall productivity (gP).

II. Basic Neoclassical (Solow) Model

The workhorse model of traditional neoclassical growth theory is that due to Solow (1956). The major innovation introduced by Solow was to allow for factor substitutability so that stable equilibrium growth could be obtained. This model is consistent with a number of stylized facts related to economic growth such as the relative constancy over time of the capital-output ratio and factor income shares. The major difficulty with this model is that growth in per capital output converges to zero in the steady state. In order to have steady state growth exogenous technological change was introduced. A problem from the stand point of policymaking in developing countries is that policies have no effect on growth in the steady state of the Solow model. For example, there is evidence of a positive correlation across countries between investment rates and growth, but in the Solow model this world affect the long-run level of output but not growth rates. The neoclassical growth theory in the Solow-tradition is based on the following production function:

Y(t) = F[K(t),A(t),L(t)]

Where Y is output, K is physical capital, A is an index of total factor productivity, and L is the labor force; there are constant returns to scale and decreasing returns to capital.

With these assumptions, income growth can come from the increased efficiency of productive inputs, i.e. an increase in A, or the augmentation of such inputs, i.e. an increase in K and/or L. Positive growth rates can be sustained if and only if the decreasing returns to the accumulation of capital are offset by population growth, or if the marginal productivity of capital is constantly shifted upwards by technical progress. In balanced growth equilibrium - i.e. given a constant savings rate - there will be no depreciation of the capital stock and, assuming A (t) as constant, output and capital will grow at the rate of population growth. Differences in the time path of the scale factor A (t) explain countries' different growth experiences. This exogenous source of growth has been interpreted as technical progress. Policy has little scope in affecting long-run growth in this setting.

Investment and savings behavior impacts on the level of per capita income, but has no effect on the long-run growth rate. Policies can raise the long-term growth rate by speeding up technical innovation or knowledge accumulation, but the theory itself suggests no mechanisms whereby this could be achieved. There are neither invention costs - costs associated with the development of new technologies - nor adoption costs - costs associated with making use of new technologies.

III. Economic Development

Economic development is the process by which the economic well-being and quality of life of a nation, region or local community are improved. The term has been used

frequently in the 20th and 21st centuries, but the concept has existed in the West for centuries. "Modernization", "Westernization", and especially "industrialization" are other terms often used while discussing economic development. (Greenwood, Daphne T.; Holt, Richard P. F., 2010)

Economic development policies in its broadest sense, policies of economic development encompass two major areas:

- Governments undertaking to meet broad economic objectives such as price stability, high employment, and sustainable growth. Such efforts include monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.

- Programs that provide infrastructure and services such as highways, parks, affordable housing, crime prevention, and K–12 education.

- Job creation and retention through specific efforts in business finance, marketing, neighborhood development, workforce development, small business development, business retention and expansion, technology transfer, and real estate development. This third category is a primary focus of economic development professionals.

IV. The Gravity Model

The gravity model suggests that relative economic size attracts countries to trade with each other while greater distances weaken the attractiveness. Initially, the gravity model was seen as an empirical one, without any particular grounding in trade theory, but the widespread adoption of the gravity model to explain patterns of trade has been seen by

economists as a significant development on previous theoretical models. (Paul R Krugman, 2011)

The basic model for trade between two countries (i and j) takes the form of

In this formula G is a constant, F stands for trade flow, D stands for the distance and M stands for the economic dimensions of the countries that are being measured. The equation can be changed into a linear form for the purpose of econometric analyses by employing logarithms. The model has been used by economists to analysis the determinants of bilateral trade flows such as common borders, common languages, common legal systems, common currencies, common colonial legacies, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).

The model has also been used in international relations to evaluate the impact of treaties and alliances on trade.

Three of the top 15 U.S. trading partners are European nations: Germany, the United Kingdom, and France. Why does the United States trade more heavily with these three European countries than when other? The answer is that these are the three largest European economies. That is, they have the highest values of gross domestic product (GDP), which measures the total value of all goods and services produced in an economy.

There is a strong empirical relationship between the size of a country’s economy and the volume of both its imports and its exports.

Figure 2.1: The Size of European Economies, and the Value of Their Trade with The United States

(U.S. Department of Commerce, European Commission)

Figure 2.1 illustrates that relationship by showing the correspondence between the size of different European economies-specifically, America’s 15 most important Western European trading partners in 2008 and those countries trade with the United States in that year. On the horizontal axis is each country’s GDP, expressed as a percentage of the total GDP of the European Union; on the vertical axis is each country’s share of the total trade of the United States with the EU. AS you can see, the scatter of points clustered around the dotted 45-degree line that is, each country’s share of U.S. trade with Europe-was roughly equal to that country’s share of Western European GDP. German has a large economy, accounting for 21 percent of Western European GDP; it also accounts for 19.9 percent of U.S. trade with the region. Sweden has a much smaller economy, accounting for only 2.7 percent of European GDP; correspondingly, it accounts for only 3 percent of U.S.-Europe

trade. Looking at world trade as a whole, economists have found that an equation of the following form predicts the volume of trade between any two countries fairly accurately,

Tij = A x Yi x Yj/Dij,

Where A is a constant term, Tij is the value of trade between country i and country j, Yj is country i’s GDP, Yi is country j’s GDP, and Dij is the distance between the two countries. That is, the value of trade between any two countries is proportional, other things equal, to the product of the two countries’ GDPs, and diminishes with distance between the two countries.

An equation is known as a gravity model of world trade. The reason for the name is the analog to Newton’s law of gravity: Just as the gravitational attraction between any two objects is proportional to the product of their masses and diminishes with distance, the trade between any two countries is, other things equal, proportional to the product of their GDPs and diminishes with distance. Economists often estimate a somewhat more general gravity model of the following form:

Tij = A x Yiax Yjb/Dijc,

This equation says that the three thing that determine the volume of trade between two countries are the size of two countries’ GDPs and the distance between the countries, without specifically assuming that trade is proportional to the product of the two GDPs and inversely proportional to distance. Instead, a, b, and c are chosen to fit the actual data as closely as possible. If a, b, and c were all equal, Equation would be the same as Equation.

In fact, estimates often find that is a pretty good approximation.

The gravity model of migration is a model in urban geography derived from Newton's law of gravity, and used to predict the degree of migration interaction between two places.

Newton's law states that: "Any two bodies attract one another with a force that is proportional to the product of their masses and inversely proportional to the square of the distance between them."

When used geographically, the words 'bodies' and 'masses' are replaced by 'locations' and 'importance' respectively, where importance can be measured in terms of population numbers, gross domestic product, or other appropriate variables. The gravity model of migration is therefore based upon the idea that as the importance of one or both of the location increases, there will also be an increase in movement between them. The farther apart the two locations are, however, the movement between them will be less. This phenomenon is known as distance decay.

The gravity model can be used to estimate: Traffic flow, Migration between two areas, the number of people likely to use one central place.

The gravity model can also be used to determine the sphere of influence of each central place by estimating where the breaking point between the two settlements will be.

An example of this is the point at which customers find it preferable, because of distance, time and expense considerations, to travel to one center rather than the other.

The gravity model can be used to measure accessibility to services (e.x., access to health care). A special case of gravity model is the two-step floating catchment area method, which is popular in health care research.

The gravity model was expanded by William J. Reilly in 1931 into Reilly's law of retail gravitation to calculate the breaking point between two places where customers will be drawn to one or another of two competing commercial centers. Opponents of the gravity model explain that it can’t be confirmed scientifically, that it's only based on observation.

They also state that the gravity model is an unfair method of predicting movement because it’s biased toward historic ties and toward the largest population centers. Thus, it can be used to perpetuate the status quo.

V. Economy of Thailand

A. Overview Economy of Thailand

Thailand is a newly industrialized country. Its economy is heavily export-dependent, with exports accounting for more than two-thirds of its gross domestic product (GDP). In 2018, according to the World Bank, Thailand had a GDP of US$ 504.9 billion, the 8th largest economy of Asia. As of 2018, Thailand has an average inflation of 1.06% percent and an account surplus of 7.5 percent of the country's GDP. The Thai economy is expected to post 3.8% growth in 2019. Its currency, the Thai Baht, also ranked as the tenth most frequently used world payment currency in 2017.

The industrial and service sectors are the main sectors in the Thai gross domestic product, with the former accounting for 39.2 percent of GDP and the later 52.4 percent in 2017. Thailand's agricultural sector produces 8.4 percent of GDP—lower than the trade and logistics and communication sectors, which account for 13.4 percent and 9.8 percent of GDP respectively. The construction and mining sector adds 4.3 percent to the country's

gross domestic product. Other service sectors (including the financial, education, and hotel and restaurant sectors) account for 24.9 percent of the country's GDP. Telecommunications and trade in services are emerging as centers of industrial expansion and economic competitiveness.

Thailand is the second-largest economy in Southeast Asia, after Indonesia. Its per capita GDP (US$7,273.56) in 2018, however, ranks in the middle of Southeast Asian per capita GDP, after Singapore, Brunei, and Malaysia. In July 2018 Thailand held US$237.5 billion in international reserves, the second-largest in Southeast Asia (after Singapore). Its surplus in the current account balance ranks tenth of the world, made US$37.898 billion to the country in 2018. Thailand ranks second in Southeast Asia in external trade volume, after Singapore.

The nation is recognized by the World Bank as "one of the great development success stories" in social and development indicators. Despite a low per capita gross national income (GNI) of US$6,610 and ranking 83th in the Human Development Index (HDI), the percentage of people below the national poverty line decreased from 65.26 percent in 1988 to only 8.61 percent in 2016, according to the NESDB's new poverty baseline. (ASEAN Secretariat, 2018).

Thailand's one of countries with the lowest unemployment rate in the world, reported as 0.63 percent for the first quarter of 2017. This is due to a large proportion of the population working in subsistence agriculture or on other vulnerable employment (own-account work and unpaid family work) and Thailand Macroeconomic trends shown in Table 2.1.

1. Agriculture, forestry and fishing. Developments in agriculture since the 1960s have supported Thailand's transition to an industrialized economy. As recently as 1980, agriculture supplied 70 percent of employment. In 2008, agriculture, forestry and fishing contributed 8.4 percent to GDP; in rural areas, farm jobs supply half of employment. Rice is the most important crop in the country and Thailand had long been the world's number one exporter of rice, until recently falling behind both India and Vietnam. It is a major exporter of shrimp. Other crops include coconuts, corn, rubber, soybeans, sugarcane and tapioca. Thailand is the world's third-largest seafood exporter. Overall fish exports were worth around US$5.8 billion in 2017, according to the Thai Frozen Foods Association.

Thailand's fishing industry employs more than 300,000 persons.

2. Electrical and electronics. Electrical and electronics (E&E) equipment is Thailand's largest export sector, amounting to about 15 percent of total exports. In 2014 Thailand's E&E exports totaled US$55 billion. The E&E sector employed approximately 780,000 workers in 2015, representing 12.2 per cent of the total employment in manufacturing.

3. Automotive. Table 2.2 present Thailand is the ASEAN leader in automotive production and sales. The sector employed approximately 417,000 workers in 2015, representing 6.5 per cent of total employment across all manufacturing industries and accounting for roughly 10 percent of the country's GDP. In 2017, Thailand exported US$27.54 billion in automotive goods. As many as 73 percent of automotive sector workers in Thailand face a high risk of job loss due to automation.

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