Aging Society and Economy Thailand Economic Monitor June 2016 The World Bank Country Director: Ulrich Zachau Director: Satu Kristiina Kahkonen Manager: Mathew Verghis 30th Floor, Siam Tower 989 Rama 1 Road, Pathumwan Bangkok 10330, Thailand (662) 686-8300 www.worldbank.org/thailand ACKNOWLEDGEMENTS This report was prepared by Kiatipong Ariyapruchya (Principal author), Miguel Eduardo Sanchez Martin, Thanapat Reungsri and Xubei Luo. Valuable comments were provided by Ulrich Zachau, Mathew Verghis, Dilaka Lathapipat and Shabih Mohib. We would like to acknowledge input from Philip O’Keefe (Part 2: Promoting healthy and productive ag- ing in Thailand). Valuable comments and information were provided by officials of the Bank of Thailand, the Ministry of Finance, the Budget Bureau, the Public Debt Management Office and the National Eco- nomic and Social Development Board. Table of Contents SUMMARY 3 PART 1. MACROECONOMIC DEVELOPMENTS AND OUTLOOK 9 A. The Economy in 2015 9 B. Outlook for 2016 32 C. Policy Watch 38 PART 2. PROMOTING HEALTHY AND PRODUCTIVE AGING IN THAILAND 48 BOXES Box 1. Thailand: Pushing Mega Projects Through Fiscal Bottlenecks 23 Box 2. How Could Thailand’s State-Owned Enterprises be Governed? 43 National Holding Companies and international Experience Thailand Economic Monitor | June 2016 2 June 2016 | Thailand Economic Monitor Summary The Thai economy shows signs of a that a recovery, albeit narrowly-based, nascent recovery but faces challenges on the is underway. The Thai economy expanded path toward a broad-based and sustained by 3.2 percent, higher than 2.8 percent growth recovery. The Thai economy accelerated to 2.8 in previous quarter and the highest rate in 12 percent in 2015, compared to 0.9 percent in 2014, quarters. While fiscal stimulus and tourism partly on the basis of government consumption receipt have driven demand recovery, there is and investment, and partly on declining imports. a risk that spending—either from lower tourist Tourism and private consumption have mildly arrivals amid a slowing global economy, or from recovered, whereas merchandise exports dropped moderating fiscal stimulus due to implementation in the last quarter of 2015. Economic growth fatigue—before the recovery becomes broad- is expected to moderate to 2.5 percent in 2016 based and self-sustained. Fiscal stimulus in primarily due to sluggish exports of goods and recent quarters has been an impressive pickup in private investment amid a slowing and difficult public infrastructure investment, which has risen global environment. Fiscal stimulus and tourism toward 7 percent of GDP, the highest in almost receipts will remain key drivers of growth in 15 years. In contrast to past periods of fiscal 2016. Poverty rates are expected to fall at a slower expansion, however, the effect on overall public rate, with poor households concentrated in rural debt has so far been minimal. areas affected by falling agricultural prices. Downside risks to economic growth include a The prolonged slowdown has hard landing in China accompanied by global laid bare structural challenges such as financial turmoil as well as heightened domestic slow public investment implementation, political uncertainty. Nevertheless, ample fiscal lackluster export competitiveness and and monetary buffers, a sound financial sector skills mismatch that impinge on both the and strong fundamentals will help Thailand recovery and long-term growth. Structural weather shocks. reforms would help address these challenges and lift Thailand’s long-term growth path. In The Thai economy’s strong addition, the Thai population is aging at an performance in Q1 2016 due to tourism unprecedented pace—the share of working-age receipts and fiscal stimulus suggests population is projected to start declining in 2016 3 Thailand Economic Monitor | June 2016 while the elderly dependency ratio in Thailand Thailand as a whole, falling from 14.3 percent (the percentage of people 65+ relative to the in 1988 to an estimate of around 0.03 percent working age population) is expected to almost in 2015. Based on the national poverty line (in triple from around 15 percent presently to 42 2013, approximately US$6.20 per day 2011 PPP), percent by 2040. Demographic dividends can no the poverty rate fell from 12.3 percent in 2011 to longer contribute to growth and inclusiveness in 10.9 percent in 2013. the same manner as before. Society as whole will have to rethink how to care for the elderly in light Outlook of more limited resources. Real GDP growth is projected to be Continued economic reforms 2.5 percent in 2016 primarily due to fiscal can address structural challenges and stimulus and tourist receipts. Consumption unleash new sources of growth. The current would continue to underpin growth, although government has drafted Thailand’s first 20-year modestly, in a context of improving consumer strategic plan and embarked on an ambitious confidence, whereas private and foreign direct economic reform program for inclusive and investment are likely to stay at low levels due to sustainable growth by harnessing new engines weak external demand and political uncertainty. of growth such as technology, innovation, and Exports of goods will remain flat amid a difficult services. Reform progress has already been made external environment. Global growth is projected in many areas such as large public infrastructure at 2.4 percent due to sluggish growth in advanced investment, state-owned enterprises, specialized economies, slowing growth in major emerging financial institutions, taxes and a retirement markets, stubbornly low commodity prices, weak safety net for informal workers. Going forward, global trade, and diminishing capital flows. The the sustained pace and quality of reforms as current account balance is expected to narrow in well as sound implementation will be crucial the following years as imports recover. Finally, the for translating the reform effort into the desired timely implementation of public infrastructure economic outcomes. The reform agenda takes on projects (dual track rail and rail upgrading) in an added sense of urgency in light of Thailand’s 2016 and 2017 would help contribute to a more ticking aging clock. The greater the progress positive outlook. made on reforms, the better prepared Thailand will be for an aged society. The stagnation of manufacturing production is likely to adversely impact Thailand continues to make poor urban households with low-skilled progress in reducing poverty. Extreme workers employed in the lower end of the poverty as measured by the international extreme manufacturing sectors. Rising agricultural poverty line (US$1.90 per day, 2011 purchasing income in the recent years mainly reflected power parity [PPP]) is no longer a concern for real increase in agricultural prices and not 4 June 2016 | Thailand Economic Monitor productivity increases in agriculture. As the to decline in 2016—demographic dividends can agricultural prices fall back to more normal no longer contribute to growth and inclusiveness levels, growth could become less inclusive, with in the same manner as before. The elderly the rural poor negatively affected. Constrained dependency ratio in Thailand (the share of people by education and skills levels, a large share of 65+ relative to the working age population) the poor workers might not be able to reap the is expected to almost triple from around 15 full benefit of job opportunities in the high-end percent presently to 42 percent by 2040. Pockets services sector. As a consequence, poverty is of poverty increasingly concentrate in the expected to decline at a slower rate in both urban lagging Northeast, North, and Deep South, and and rural areas. among the households residing in remote areas and with limited means to support themselves Emerging Challenges through productive means, for example elderly households with few individuals of working age. In the unlikely event of a hard landing for the Chinese economy, accompanied by Policy Watch global financial turbulence, Thailand would be mostly affected through the trade and The current government has embarked expectations channel, as China represents 12 on an ambitious economic reform program for percent of total exports and 8 percent of total inclusive and sustainable growth by harnessing FDI inflows. Nonetheless, Thai exports are well new engines of growth such as technology, diversified in terms of products and markets, innovation, and services. The reform program and authorities still have ample monetary encompasses areas such as competitiveness (5 and fiscal buffers. The second risk is that of S-curve innovative sectors, SME promotion, a return to the administrative gridlock seen ease of doing business, skills and education), tax in the years prior to the current government’s (personal, property and inheritance taxes, FDI tenure if ongoing reforms, economic and and SME tax incentives), state-owned enterprises political, do not satisfy civic society at large. In (state-owned enterprises and specialized financial such a scenario, administrative gridlock may institutions), infrastructure (rail, road, and air lead to heightened political uncertainties and links; integrated water management) and digital weigh on consumer and investor confidence. economy (broadband access and e-payments for A third risk is that fiscal stimulus runs out SMEs and online commerce). of steam as the impact of incentives taper out and large public infrastructure projects are not Progress has been made with regards to implemented on time. the implementation of multi-year large public infrastructure projects, setting up of a State The Thai population is aging rapidly— Enterprise Policy Committee and a holding the share of working-age population might start company to improve state-owned enterprise 5 Thailand Economic Monitor | June 2016 governance, transfer of supervisory oversight pace, faster than other ASEAN countries. As of of specialized financial institutions to the Bank 2016, around 11 percent of the Thai population, of Thailand, approval of progressive inheritance or almost seven and a half million people, are and property taxes and the launch of the National 65 years old or older, up from only 5 percent as Savings Fund, a retirement safety net for informal recently as 1995. By 2040, there is projected to be workers. The government has also ceased the 17 million Thais 65 years and older, accounting rice-pledging scheme which incurred large losses for more than a quarter of the population. The and contributed to labor market misallocation. speed of aging is among the fastest seen globally to date. Together with China, Thailand already Going forward, the sustained pace and has the highest share of elderly people of any quality of reforms as well as sound implementation developing country in East Asia and Pacific, and will be crucial for translating the reform effort it is expected to have the highest elderly share by into the desired economic outcomes. With 2040. Put another way, the elderly dependency regards to the large public investment project ratio in Thailand (the percentage of people program it is recommended that the authorities 65+ relative to the working age population) is conduct robust cost-benefit analysis, take these expected to almost triple from around 15 percent projects through an implementation-readiness presently to 42 percent by 2040. criteria, secure multiyear budgets, and put in place a monitoring and evaluation system to The primary driver of rapid aging has ensure projects with high economic value are been the steep decline in fertility rates, with the implemented in a timely and cost effective total fertility rate per woman falling from around manner. Planned reforms in additional areas such 6.1 in 1965 to only 1.5 in 2015 as a result of rising as education and competition will be particularly income and educational levels and the successful important to take Thailand from middle to high National Family Planning Program launched in income. The reform agenda take on an added 1970. In the same period, life expectancy rose sense of urgency in light of Thailand’s rapid from just under 62 years old to almost 74.7 aging. Unlike many advanced economies that years (World Development Indicators). Both transitioned from middle to high income before indicators can be considered positive outcomes aging, Thailand will likely age before attaining of development and supportive government high income status. Nonetheless, the greater policies. the reform progress, the better Thailand will be prepared for an aged society. An important consequence of these trends is the expected decline in working age Promoting Healthy and Productive Aging population. Using the standard International in Thailand Labor Organization (ILO) definition of 15- 64 years old, the working age population of Thailand is aging at an unprecedented Thailand is expected to shrink by around 11 6 June 2016 | Thailand Economic Monitor percent as a share of the total population between now and 2040, with an even sharper decline in terms of absolute numbers from just under 49 million to around 40.5 million people. In terms of population share, the forecasted decline in working age population is higher in Thailand than any developing EAP country in the period (even higher than China). The other notable feature which Thailand shares with a number of its developing Asian neighbors is that it is aging rapidly at a relatively low level of GDP per capita. While Thailand is a solidly upper middle income country, compared to rich East Asian countries and those of the OECD, it is aging at a much lower income level, suggesting that fiscal and administrative capacity to address aging is likely to be constrained. The speed of demographic transition in Thailand poses new challenges for policymakers, employers and citizens, but also opportunities. Aging will require policy action and behavioral change in a number of areas. In labor markets, the challenge is to mitigate the structural decline in working age population and to enhance labor productivity of the shrinking labor force. In fiscal terms, the biggest risk will be pension spending, but there are significant challenges also for healthcare and aged/long-term care systems to ensure affordable care for all in a sustainable manner in a context of rapid aging. At the same time, aging offers expanded opportunities for Thailand as a provider of services to the growing elderly population across the region. 7 Thailand Economic Monitor | June 2016 8 June 2016 | Thailand Economic Monitor Part 1. Macroeconomic Developments and Outlook A. The Economy in 2015 Real Sector Developments the values attained in 2013. In addition, by end- 2015 producer prices declined by 3.6 percent, Economic growth accelerated year on year (Figure 2, right panel). to an estimated rate of 2.8 percent in 2015, compared to 0.9 percent in 2014, Consumption only jumped in the underpinned by public consumption. last quarter of 2015, sparked by fiscal Quarterly GDP attained growth rates of 2.9 incentives. Car sales remained weak in 2015, percent and 2.8 percent in Q3 and Q4 2015, below 2010 levels. The index of car sales for respectively. Following stagnation in Q3 2015, consumption purposes jumped from 94.8 to domestic demand recovered in the last quarter of 118.9 points between November and December the year (5.1 percent growth, y-o-y), fostered by a 2015, to fall back to 78 points in January 2016 series of short-term fiscal incentives. Net exports (Figure 2); this is explained by a surge in car sales contributed positively to growth in Q3 2015, in prior to an increase in the automobile excise tax a context of declining imports, but merchandise in January 2016. Similarly, retail sales remained exports dropped again in the last quarter of the weaker than in 2013 and 2014, and experience a year, as China slowed down. Private investment surge by the end of the year. In turn, the VAT of remains subdued. hotel and restaurant index, continued improving in 2015 respect to previous years, presumably Economic recovery in 2015 was not helped by the recovery in tourism. Still weak as broad-based and sustained as expected consumption coupled with low international in late 2014. As a result, consumer confidence commodity prices resulted in inflation being dropped in the first nine months of the year, prior slightly negative in 2015. to increasing in the last quarter, when temporary tax deductions helped underpin consumption. On the production side, the As can be observed in Figure 1, the Value Added performance of the services sector in 2015 Production Index has overall presented a similar improved noticeably with respect to 2014. evolution, while following smoother patterns, Construction (16.4 percent, y-o-y) and hotels and timidly recovered in the second half of 2015. and restaurants (14.5 percent) were the fastest Industrial production levels are still well below growing sectors in 2015, although they represent 9 Thailand Economic Monitor | June 2016 FIGURE 1. THAILAND: CONTRIBUTIONS TO QUARTERLY GDP GROWTH (LEFT) AND INDUSTRIAL PRODUCTION AND CONSUMER CONFIDENCE (RIGHT) Sources: World Bank staff using NESDB and Bureau of Trade and Economic Indices, MOC a relatively small share in total GDP. Related to Construction and real state the latter, growth in quarterly tourist arrivals accelerated in 2015. Condominium registration averaged 28 percent in January-September 2015, increased by 8.8 percent in 2015, compared to prior to easing to 4.3 percent in Q4, y-o-y. Larger 2014. The price of land and condominiums has service sectors such as financial intermediation been experiencing a steady decline since early and transport and communication presented 2009 (around 60 percent, in nominal terms). also healthy growth rates (7.5 and 7.3 percent, Outstanding debt hold by real estate developers respectively). On the other hand, public increased by 48 percent since January 2009, administration, and education presented negative whereas outstanding personal housing credit growth rates, recovering only in Q4 2015 as the more than doubled. This is likely to be explained government introduced some fiscal stimulus by the fast increase in the number of property measures. Agriculture activity severely contracted units sold (also per capita), as well as by lower in 2015, affected by a delayed rainy season and household saving resulting in the need to request low international commodity prices, and resulted higher mortgages. in a drop in farm income. Manufacturing, traditionally the main engine of growth struggled in 2015 in a context of weak external demand, and despite the acceleration in car production and rubber sheets and rolls observed in late 2015, prior to tax hikes starting January 2016. 10 June 2016 | Thailand Economic Monitor FIGURE 2. EVOLUTION OF CONSUMPTION RELATED INDEXES (TOP) AND PRICE INDEXES (BOTTOM) Sources: The Office of Industrial Economics, Ministry of Industry, and NESDB 11 Thailand Economic Monitor | June 2016 FIGURE 3. EVOLUTION OF PROPERTY PRICES (TOP) AND CREDIT (BOTTOM) Source: Department of Land, Ministry of Interior, Real Estate Information Center 12 June 2016 | Thailand Economic Monitor TABLE 1. SUPPLY SIDE OF GDP, REAL Y-O-Y GROWTH RATES 2013 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Share of 2015 GDP Total Agriculture 0.8 0.7 -4.6 -4.1 -5.5 -3.4 6.7% Agriculture 1.5 0.9 -5.3 -4.2 -5.5 -4.4 5.2% Fishing -7.0 -2.0 2.2 -1.5 -3.1 6.5 1.4% Non-Agriculture 2.9 0.8 3.9 3.2 3.2 4.2 93.8% Mining 1.8 -1.6 0.1 -1.4 2.4 3.7 2.5% Manufacturing 1.7 -0.2 2.2 -0.2 1.0 0.8 28.1% Electricity, Gas, Water supply -1.0 2.7 3.7 2.8 4.8 5.0 3.3% Construction 0.1 -3.7 19.6 12.5 9.4 23.9 2.8% Retail & Wholesale 0.8 -0.5 4.1 3.7 4.1 5.5 14.6% Hotels and Restaurants 10.1 2.4 18.0 22.1 12.7 5.0 5.2% Transport and communication 5.6 3.4 8.1 9.7 6.7 5.3 10.2% Financial intermediation 14.1 6.8 8.0 7.7 5.9 7.5 6.9% Real Estate 2.6 0.5 4.5 2.2 3.1 6.6 8.3% Public administration 0.2 1.3 -2.8 -1.4 0.0 1.3 5.2% Education 2.1 0.9 -5.8 -4.0 -3.9 2.3 3.3% Health 0.5 2.7 -0.8 0.9 3.0 4.2 1.8% Other social services 6.8 -0.1 2.9 5.4 6.1 8.3 2.0% Domestic service -7.3 -4.4 -2.3 -0.9 -0.6 1.5 0.2% Gross Domestic Product 2.8 0.9 3.0 2.7 2.9 2.8 100% Source: World Bank staff; NESDB 13 Thailand Economic Monitor | June 2016 TABLE 2. EVOLUTION OF AGRICULTURE SECTOR Agriculture activity severely INDICATORS IN THAILAND contracted in 2015, affected by falling prices and el Nino phenomenon. Both agriculture %YoY, unless Q1 Q2 Q3 Q4 production and agriculture prices declined by 5.9 otherwise indicated 2015 2015 2015 2015 percent in 2015. As of January 2016, the prices of Farm Income -6.4 -15.9 -14.8 -8.8 rubber, jasmine rice and cassava were at 76, 84, and 86 percent of its average 2014 level, whereas Production 1 -10.8 -10.6 -3.2 those of paddy rice and maize were at 2014 levels. Price -7.3 -5.8 -4.7 -5.8 As a result of subdued international demand and Farm Income Index SA 177 160.1 160.9 159.4 falling prices, seasonally adjusted farm income (2005=100) dropped by 17 percent in Q2 2015. Source: Office of Agricultural Economics Low manufacturing growth is attributed to weakened external demand. Merchandise exports contracted by 5.6 percent in 2015, in a context of slowdown in China and other emerging economies. Nonetheless, a recovery in exports of automotive components, circuits, and computer parts seem to have started recovering in the second half of 2015, the former presumably helped by the commercialization of new models of cars. While exports of optical appliances and instruments continued to grow, according to the Bank of Thailand they have slowed in a context of weakening global demand for smart phones. Meanwhile, the prices of petroleum-related exports continued to drop. As can be observed in commodities present much larger volatility than other merchandise exports, with rubber and rice exports moving in opposite directions. In a context of contracting exports and sluggish manufacturing, imports of raw materials, intermediate goods, and capital goods dropped in 2015, with only consumer good exports recovering in late 2015. 14 June 2016 | Thailand Economic Monitor FIGURE 4. EVOLUTION OF KEY EXPORTS Source: World Bank staff using Bank of Thailand FIGURE 5. PRIVATE INVESTMENT INDEX (LEFT) AND GROSS CAPITAL FORMATION AS % OF GDP (RIGHT) Source: World Bank staff using Bank of Thailand, World Development Indicators 15 Thailand Economic Monitor | June 2016 Private investment has remained its regional neighbors since 2008. As a result, subdued, although there are modest signs of Thailand’s market shares for many of its top recovery. Weak external demand coupled with exports have declined from 2008 to 2016 or political uncertainty on the domestic front results risen slower than its competitors in developing in lower private capital formation and delayed Asian countries. China and India, on the other foreign direct investment decisions. Investment hand, have been able to increase the global for capacity expansion in manufacturing remains shares of almost all of Thailand’s top exports subdued. Nonetheless, it is worth noting an products. One illustrative example is Thailand’s improvement in the private investment index export focus on hard disk drives (HDD) and during the second half of 2015, facilitated by inability to move up the value chain into solid improved corporate funding, new investments in state drives (SSD) which are commonly used in alternative energy and telecommunications, and innovative electronic products. One underlying acceleration in car purchases (Bank of Thailand, reason is skills and education. The World Bank 2016). Thailand has traditionally maintained enterprise survey (2012) indicates a shortage levels of capital formation similar to those of of workers with basic and technical skills. Also, other peer middle income economies, although a recent World Bank study1 finds functional they decelerated substantially between 2013 and illiteracy across the various types of schools in 2014, declining from 27.5 to 24.1 percent of GDP. Thailand, indicating that there are still system- wide issues affecting the quality of education. Thai exports contracted by One manifestation of this issue is that close to a 5.6 percent amid a slowing global third of young university graduates elect to join economy but suffers from long declining the informal sector. competitiveness. While major trading partners such as the US and the Euro continued to recover A series of fiscal stimulus measures moderately, China’s slowdown affected ASEAN introduced in FY2016 is expected to result as well as Thai exports. The fall in commodity in a larger budget deficit of 2.9 percent of prices, such as rubber, have also hurt Thai GDP, compared to 1.8 percent in FY2015. exports. However, neighbors’ exports in the The result of slowdown in global economy, the region have performed better than Thailand’s. government short-term priority is to stimulate Stagnant Thai export growth in the past few years domestic economy through expansionary fiscal may therefore indicate falling competitiveness. policy. The budget deficit of 390 billion baht Thailand’s major export products have expanded planned for FY2016 increased significantly by at a slower pace than those same products from 140 billion baht (or 56 percent) from 250 billion baht deficit in FY2015. 1 Dilaka Lathapipat and Lars M. Sondergaard (2015). Thailand – Wanted: a quality education for all. World Bank. 16 June 2016 | Thailand Economic Monitor FIGURE 6. BUDGET DEFICIT AS PERCENT OF GDP FIGURE 7. THAILAND STIMULUS MEASURES 2015 (PERCENT ALLOCATED) 17 Thailand Economic Monitor | June 2016 Thailand’s new economic team Moreover, in fiscal year 2016 (Oct 2015 – Sep appointed in August 2015, has introduced 2016), government tried to accelerate capital a series of stimulus measures to revive the budget spending in projects valued less than 2 economy. The stimulus measures amount to million baht to complete disbursement within 360 billion baht or 2.7 percent of GDP which the first quarter (Oct 2015 – Dec 2015). The total can be classified into three categories according amount of investment project under 2 million to objectives 1) support low-income earners baht is 39,700 million baht. However, as of 15 and boost public small-size investment project January 2016, the disbursed amount was only including soft loans to village funds, sub-district 25,800 million baht or 65 percent. investment projects, and small public investment projects worth 136 billion baht; 2) Small, and Revenue collection slightly increased Medium-sized Enterprises (SMEs) supporting in FY2015 respect to FY2014. Even though measures including soft loans to SMEs, SMEs revenue collection in FY2015 was slightly lower credit guarantee schemes, and venture capital than estimated due to slower-than-expected funds worth 206 billion baht; 3) monetary and economic recovery and falling crude oil prices, it fiscal stimulus on property sector including proved higher than FY2014 because of remittances personal income tax exemption for home- from SOEs, revolving fund, and VAT collection. buyers, transfer and mortgage fee reduction, and In FY2016, the revenue collection is expected accommodation loans for low income earners to be slightly higher than FY2015 as a result of worth 18 billion baht. economic stimulus measures. Moreover, in Q1 of FY2016, there was extra revenue collection from In addition, the government also the remittance of the 4G licensing fee with the introduced a series of incentives and amount of 40,290.5 million baht by the Office of changes in tax policy aimed at supporting National Broadcasting and Telecommunications individual and promoting business Commission (NBTC) which expanded the share investment. This includes a new personal of non-tax revenue collection significantly from income tax structure which will allow more 13 percent to 21.3 percent. low-income earners to be exempted from tax, a permanent reduction of Corporate Income Tax The remittance revenue from SOEs rate from 23 percent to 20 percent, real estate and revolving funds are the main drivers stimulus package, R&D promotion, national behind an increase in FY2015 revenue e-payment, tax exemption and reduction up to collection. SOEs in Thailand were able to remit 15 years for FDI. their revenue 18 percent higher than last fiscal year equivalent to 41.25 billion baht. The top five However, as of 30 December 2015, SOE remittances include Electricity Generating disbursement stimulus measures stood at Authority of Thailand (EGAT), PTT Public only 63.2 percent of the allocated amount. Company Limited, Government Saving Bank 18 June 2016 | Thailand Economic Monitor FIGURE 8. REVENUE COLLECTION CLASSIFIED BY REVENUE BASE AS PERCENT OF GDP (GSB), Government Lottery Office (GLO), and to raise an additional tax revenue of around Provincial Electricity Authority (PEA). 0.01% of total tax revenue. However, in 2015 to early 2016, the government introduced a number Revenue collection in Thailand of tax exemptions and reductions to stimulate has remained flat historically, close to 20 domestic consumption, support businesses, and percent of GDP. Thailand has relied mainly attract FDI to counter the impact of the global on tax revenue which account for 90 percent of economic slowdown. The total amount of tax total revenue collection. The major sources of expenditure is unclear and the net impact on tax revenue are General Sales Tax, Corporate revenue collection remains a question. Income Tax, Excise Tax, and Personal Income Tax. The remaining 10 percent come from non- Fiscal stimulus resulted in a slightly tax revenue such as sales of goods and services, higher budget execution in FY2015 income from State Own Enterprises (SOEs), fees compared to the previous year. The budget and charges, etc. The government has tried to allocation in FY2015 was 2.575 trillion baht, overcome this bottleneck by expanding the tax increasing from 2.53 trillion baht in FY2014 by base by introducing the “Single Account Scheme” only 0.05 trillion bath or 2 percent. The recovery to formalize Small and Medium-Enterprises’ of domestic economy slowdown through budget tax filing under a system, incentivize SMEs to expenditure, the execution rate raised from 89 pay taxes and expand tax revenue in the future. percent in FY2014 to 92.4 percent in FY2015. Another attempt was the introduction of the The major improvement was in the capital budget inheritance tax in July 2015 which is expected execution rate which increase from 65.8 percent in 19 Thailand Economic Monitor | June 2016 FIGURE 9. CAPITAL BUDGET VS. ACTUAL (PERCENT OF BUDGET) FIGURE 10. PUBLIC DEBT TO GDP RATIO 20 June 2016 | Thailand Economic Monitor FY2014 to 73.7 percent in FY 2015 while current The fiscal position remains sound budget execution rate increase slightly from with ample fiscal room. Public debt in FY2015 93.7 percent to 95.5 percent respectively. For the declined slightly from FY2014. However, the current budget, in FY2015, around 6.0 percent share of public debt to GDP increased slightly to of GDP goes to compensation of employees, 3.7 44.64 percent in the first quarter of FY2016 due percent for goods and services, 1.2 percent for to fiscal stimulus and the concomitant increase interest payment, 1.9 percent for social benefits, in the budget deficit. Despite the slight increase, and 3.5 percent for other expenses. This pattern the public debt level remains well below the of composition has been observed since FY2010. 60 percent debt ceiling set by the Ministry of Finance. According to the latest public debt Capital expenditure is the main sustainability analysis prepared by the IMF (IMF focus for the government in FY2016 Article IV report for Thailand, May 2015), under but implementing mega projects will be the baseline, the debt-to-GDP ratio is forecasted challenging. The annual budget increased by to remain around 47 percent of GDP which is 0.145 trillion baht or 5.6 percent from 2.575 below the government’s ceiling of 60 percent and trillion baht in FY2015 to 2.720 trillion baht. The far below the IMF benchmark of 70 percent. The government has focused on expanding capital baseline assumes an average growth of 4 percent expenditure from 2.7 percent to 4.0 percent in the medium run and expansion in overall of GDP. The growing annual budget reflects public sector deficit from 1.9 percent in FY2015 the government’s determination to stimulate to 2.6 percent in FY2019, as the government the economy. Nevertheless, past total budget starts implementing large infrastructure projects. disbursement of annual budget has been lower Strong fiscal rules are applied to maintain fiscal than the budgeted amount by around 1-2 percent sustainability. Even though there are no legal of GDP causing fiscal stimulus to be less effective implications, the fiscal sustainability framework, than it should be. The deviation was largely established by the Ministry of Finance since caused by capital expenditure and suggests that 2001, is strictly observed.2 implementing the planned mega projects will be challenging (see Box 1). 2 There are four main indicators including: 1) Public debt to GDP ratio (<60 percent); 2) Debt service to total annual budget (<15 percent); 3) Budgetary balance (within FY2017); and 4) Capital investment budget to total budget (at least 25 percent). There is also the Public Debt Management Act of 2005 (amended 2008) which allows the government to only borrow up to 20 percent of its annual budget plus 80 percent of principal debt repayments. However, in times of emergencies such as during the great floods of 2011, the Cabinet can issue Emergency Decrees for additional borrowing in amounts that exceed those stipulated in the PDMO Act. 21 Thailand Economic Monitor | June 2016 22 June 2016 | Thailand Economic Monitor Box 1. Thailand: Pushing Mega Projects through Fiscal Bottlenecks Thailand’s history of slow capital agencies at least 18 months to secure approval expenditure disbursement suggests that on Environmental Impact Assessments (EIAs). timely implementation of planned large Furthermore, agencies do not get enough budget public infrastructure investment, or allocation for mitigation measures. As a result, “mega projects”, will be difficult. Over affected communities do not trust mitigation the past 15 years or so, on average only 70 measures and may be unwilling to move. Fourth, percent of capital expenditure is executed each G-to-G procurement should also be more year. In FY2016, the government attempted to transparent (i.e. cost of borrowing and terms expedite capital spending through the Bureau of repayment needs to be published). Fifth, an of the Budget (BOB)’s Efficiency Enhancement independent appraisal institution (e.g. Korea Measure and Comptroller’s General Department Development Institute in South Korea publishes (CGD)’s e-Government Procurement (e-GP). assessment and multi-criteria methodology) These measures and systems were designed is important to validate project appraisals and to encourage line agencies to disburse capital increase transparency. expenditure. Despite considerable efforts from BOB and CGD, the actual capital disbursement Complexity of procurement, changes in in the first quarter of FY2016 (Oct-Dec 2015) was project design and estimated cost, and limited only 11 percent of budgeted capital expenditure, capacity of implementing agencies as well as well below the targeted 19 percent. Therefore, the constructors also cause additional delay. six mega investment projects approved by the cabinet FY2015 for 250,000 million baht and the t Complexity of procurement: 12 projects approved in FY2016 for 1.5 trillion although CGD has introduced e-GP baht may not provide the intended impact to the since FY2013, there is still a lot of economy. misunderstanding among line agencies due to user-unfriendly interface and There are five appraisal bottlenecks limited technical support. The e-GP which delay large public investment system is also prone to instability and projects. First, the project appraisal process is disconnects. All these challenges cause unclear with no written guidelines for agencies delays in the procurement process. to follow. The appraisal should have detailed project design, cost and benefit analysis, and an t Changes in detailed project design: implementation timeline. Second, agencies are during budget requests, all agencies are not allowed to begin the procurement process required to submit a detailed project before budget approval. In fact, pre-procurement design to the BOB as a criteria for should be allowed so implementation can start investment budget review. However, right after the budget approval. Third, it takes some projects design were drafted a few 23 Thailand Economic Monitor | June 2016 years prior and have not been updated Thailand and many other with the current geographical changes of economies, both emerging and advanced, the construction site. Once the projects are increasingly challenged with are allocated, detailed project design is developing better strategies to improve revised for actual implementation at the public investment management for growth construction site and changes may need and shared prosperity. The recent global to be made. Those changes may require financial crisis, diminishing fiscal space, and low approval from the Minister, BOB, and commodity prices have heightened concerns the Cabinet depending on the scale of around how to increase public investment the project. The changes and approval efficiency. For Thailand, public transportation process cause delay in disbursement. infrastructure can connect the country with the growing economies of the ASEAN economic t Change in project cost estimation: community as well as the Greater Mekong sub changes in estimated cost may result region. However, public investment in physical from changes in detailed design or assets, including health or education facilities fluctuations in construction material that contribute to improvements in human price, especially oil price. If the increase capital, is often weakened by low efficiency in estimated cost of the project is more stemming from poor project selection, appraisal than 5 percent of the original estimation, and implementation. International experience those changes will need approval from shows reforming public investment management the Cabinet. systems is not easy. Managing increasingly sophisticated investments, including through t Limited capacity of agencies and public-private partnerships, is institutionally constructors: construction delays complex. Reforming public management systems due to the constructor’s limited cash is politically challenging given strong vested flow, expertise, labor, and machinery. interests and requires buy-in by both cross- In some cases, constructors cannot cutting and sectoral agencies. With regards access construction site because the to Thailand’s large public investment project agency have not obtained permission to program it is recommended that the authorities operate at the site. In some agencies, the conduct robust cost-benefit analysis, take these procurement process is delegated from projects through an implementation-readiness central to frontline agency unit which criteria, secure multiyear budgets, and put in lack personnel and expertise to perform place a monitoring and evaluation system to procurement. ensure projects with high economic value are implemented in a timely and cost effective manner. 24 June 2016 | Thailand Economic Monitor Recent equity developments FIGURE 11. POVERTY DEVELOPMENTS Thailand has made impressive progress in reducing poverty over the past two decades. Extreme poverty as measured by the international extreme poverty line (US$1.90 per day, 2011 PPP) is no longer a concern for Thailand as a whole, falling from a rate of 14.3 percent in 1988 to 0.04 percent in 2013. Based on the national poverty line (in 2013, approximately US$6.20 per day 2011 PPP), the poverty rate fell from 67.4 percent in 1986 to 10.9 percent in 2013, with 26.6 million Thai people moving out of poverty (Figure 11). However, poverty and vulnerability GNI per capita index, Atlas Method (2006 = 100) continue to pose significant challenges, with pockets of poverty remain in lagging regions, such as the Northeast, North, and Deep South. As of 2013, 7.3 million Thais were still living in poverty, measured by the national poverty line (at about US$6.20 in 2011 PPP). Moreover, an additional 6.7 million, or 14 million in total, were living within 20 percent above the national poverty line and remained vulnerable to falling back into poverty. Over 70% of the poor people (or 5.2 million out of the total 7.3 million in Thailand) lived in the Northeast and North regions, which have the highest share of poor relative to the total population living in each region as well as the highest number of poor. The share of Thailand’s poor living in the Northeast and North increased from 61 percent in 1986 to 71 percent in 2013, despite the fact that the total population living in these two regions declined from 55 percent to 45 percent. Among the top 15 provinces with the greatest number of poor, 9 25 Thailand Economic Monitor | June 2016 FIGURE 12. POVERTY RATE BY AGE AND GENDER IN 2013 FIGURE 13. POVERTY AGE-GENDER PYRAMIDS Data Source: Socio-Economic Surveys 26 June 2016 | Thailand Economic Monitor TABLE 3. DECOMPOSITION OF POVERTY CHANGES INTO GROWTH AND REDISTRIBUTION COMPONENTS PERIOD 1986-1996 1996-2000 2000-2013 1986-2013 Change in poverty (%) -22.54 4.63 -39.38 -57.28 Growth component -24.09 4.63 -33.17 -50.16 Redistribution component 1.55 0.00 -6.22 -7.12 Note: The measure of poverty is based on real per capita household expenditure, which is normalized to 2011 using national CPI produced by the Bureau of Trade and Economic Indices, Ministry of Commerce. Bourguigon (2005) residual included in the redistribution component. The unique poverty line is set at the unique average real household poverty line in 2011. of them have been on the lists for both 1996 and Economic growth has been the key 2013, of which 8 are in the Northeast. driver of poverty reduction in Thailand, but redistribution is increasingly playing Children and elderly are more likely a bigger role. As shown in table 3, which to be poor (Figure 12). In 2013, the poverty rate decomposes changes in poverty over the past of children (under 15) and the elderly (above 65) three decades into a “growth component” and a are 14.7% and 14.1% respectively, compared that “redistribution component,” poverty reduction of the youth (15-25) and prime working age (25- was driven exclusively by growth during 1986- 65) 9.2% and 9.6%. This reflects the demographic 96: if not for the worsened income distribution, of the poor has changed along with the changes poverty reduction would have been 24 percent in the aging structure (Figure 4). Compared with instead of 22.5 percent. Poverty then increased 1996, the share of the elderly as a percent of the 4.6 percent during 1996-2000 due to negative total poor people in 2013 increased. growth. Figure 5 shows the changes in Gini over the past two decades, which peaked in the Looking ahead, poverty rates are early 1990s then declined. Since 2000, economic expected to fall at a slower rate, with poor growth has continued to play the dominant households concentrated in rural areas role in reducing poverty but, increasingly, affected by falling agricultural prices. The redistribution has also helped: nearly 85 percent rising agricultural income in the recent years of poverty reduction was attributable to growth mainly reflected real increase in agricultural while the remaining 15 percent was attributable prices and not productivity increases in to improvements in income distribution. agriculture. As the agricultural prices fall back Further analysis suggests that particularly for to more normal levels, growth could become less the 2006-2013 period, growth has been highly inclusive, with the rural poor negatively affected. pro-poor, likely in part thanks to factors such as government interventions including agricultural 27 Thailand Economic Monitor | June 2016 FIGURE 14. GINI COEFFICIENT OF HOUSEHOLD INCOME AND EXPENDITURE FIGURE 15. THEIL DECOMPOSITION 28 June 2016 | Thailand Economic Monitor price supports, elderly pensions, and universal FIGURE 16. SHARES OF THAI LABOR FORCE BY health care. LEVEL OF EDUCATION While the inequality have declined at the national level, gaps within the urban areas widened and those within the two leading regions (Bangkok and central) increased in relative terms. The decline of total inequality is mainly due to the decline of inequality within provinces in rural areas and that between urban and rural. Measured by Theil index, the level of inequality within urban area has not changed much over time; its share increased from 35% in 1986 to 53% in 2013. The inequality between urban and rural areas was about 20% of total inequality during the period 1986-2000; of the manufacturing sectors. Constrained by the then its share decreased to 9% in 2013. Among education and skills levels, a large share of the the five regions, inequality within Central and poor workers might not be able to reap the full Northeast is relatively higher; however, that benefit of the job opportunities in the high-end within South and North is relatively lower. services sector. More and gradually better jobs Education is an important factor were crucial in translating economic that drives the increase of household growth into shared prosperity. As the expenditure. The increase in the number of economy modernized, millions of off-farm employed workers in Thailand was accompanied jobs were created: 6.7 million such jobs were by significant improvements in the educational created in during 1987-96, and another 5.7 attainment of the labor force. As shown in million during the years 2000-13. These jobs the Figure 16, the share of the labor force with initially required very little education, but they primary education or below declined from 84.5 provided a rapidly expanding population (and percent in 1986 to 49.2 percent in 2013. Over the former farmers) with higher incomes, the same period, the share of workers with secondary possibility of further skills development, and education jumped from 10.8 percent to 32.5 insulation from the whims of nature (droughts, percent, while the share of workers with post- floods and fluctuating commodity prices). The secondary education increased from 4.7 percent stagnation of manufacturing production is likely to 18 percent. However, return to education to adversely impact poor urban households with declined in the recent years, which partially low-skilled workers employed in the lower end negated the positive effect. 29 Thailand Economic Monitor | June 2016 FIGURE 17. THE CONTRIBUTION OF INCOME The contribution of income AND HOUSEHOLD COMPOSITION TO and household composition to poverty POVERTY REDUCTION reduction varied between the periods of 1986-1996 and 2000-2013 (Figure 17). In the first period, labor income and non-farm income were major contributors to poverty reduction. These contributed 42 percent and 15 percent, respectively, to the total reduction of poverty experienced in Thailand (the population below the poverty line fell from 65 to 35 percent by 1996). Private transfers accounted for 12 percent of the decline in poverty, and government transfers only 2 percent. The demographic composition of the household also seems to have played a role, with greater shares of adults in working-age accounting for 8 percent of the drop in poverty, suggesting that a bigger pool of potential workers and a reduced dependency ratio may have stimulated income generation. In the second period, increasing farm income accounted for 46 percent of the observed decline in poverty, compared to only 9 percent in 1988- 1996. This is likely to be related to the sharp increase in agriculture price, which was partly a result of the increase of agricultural price in the global market and partly a result of the government support. The slowdown of structural transformation, or the limited new job creation in non-agriculture sectors, on the other hand, is likely the main factor that led to the declining role of labor income. It is worth noting that the demographic composition of the household Note: Poverty decomposition (based on Azevedo et al., 2013) is performed with consumption as welfare measure, population weights and ranking for all components. Source: SES 1988, 1996; 2000, 2013. 30 June 2016 | Thailand Economic Monitor played an increasing role in poverty reduction: the share of working-age adults and of employed working-age adults accounted for a total of 17 percent of the poverty reduction in the period of 2000-13. This suggests that demographic dividends have been playing a non-negligible role in poverty reduction. 31 Thailand Economic Monitor | June 2016 B. Outlook for 2016 The Thai economy’s strong and political uncertainty. Exports of goods will performance in Q1 2016 due to tourism remain flat amid a difficult external environment. receipts and fiscal stimulus suggests Global growth is projected at 2.4 percent due to that a recovery, albeit narrowly-based, sluggish growth in advanced economies, slowing is underway. The Thai economy expanded growth in major emerging markets, stubbornly by 3.2 percent, higher than 2.8 percent growth low commodity prices, weak global trade, and in previous quarter and the highest rate in 12 diminishing capital flows. The current account quarters. While fiscal stimulus and tourism balance is expected to narrow in the following receipt have driven demand recovery, there is years as imports recover. Finally, the timely a risk that spending—either from lower tourist implementation of public infrastructure projects arrivals amid a slowing global economy, or from (dual track rail and rail upgrading) in 2016 and moderating fiscal stimulus due to implementation 2017 would help contribute to a more positive fatigue—before the recovery becomes broad- outlook. based and self-sustained. Fiscal stimulus in recent quarters has been an impressive pickup in The growth outlook is subject to public infrastructure investment, which has risen risks, both external and internal. In the toward 7 percent of GDP, the highest in almost unlikely event of a hard landing for the Chinese 15 years. In contrast to past periods of fiscal economy, accompanied by global financial expansion, however, the effect on overall public turbulence, Thailand would be mostly affected debt has so far been minimal. through the trade and expectations channel, as China represents 12 percent of total exports and Real GDP growth is projected to be 8 percent of total FDI inflows. Nonetheless, Thai around 2.5 percent in 2016 primarily due exports are well diversified in terms of products to continued fiscal stimulus and tourism and markets, and authorities still have ample receipts. Consumption would continue to monetary and fiscal buffers. The second risk is underpin growth, although modestly, in a context that of a return to the administrative gridlock of improving consumer confidence, whereas seen in the years prior to the current government’s private and foreign direct investment are likely tenure if ongoing reforms, economic and to stay at low levels due to weak external demand political, do not satisfy civic society at large. In 32 June 2016 | Thailand Economic Monitor TABLE 4. THAILAND / SELECTED ECONOMIC AND SOCIAL INDICATORS 2011 2012 2013 2014 2015c 2016f 2017f GDP, at market prices (demand) 0.8 7.3 2.8 0.9 2.8 2.5 2.6 Private consumption 1.8 6.3 0.8 0.6 2.2 1.7 1.9 Government consumption 3.4 7.5 4.7 1.7 2.1 3.6 3.2 Gross fixed capital investment 4.9 10.2 -0.8 -2.6 5.7 2.9 4.1 Change in inventories, % contrib -0.5 0.5 0.8 -2.4 -0.2 0.0 0.0 Statistical discrepancy (% GDP) 2.7 2.8 2.6 2.0 0.5 0.4 0.4 Exports, goods and services 9.2 5.1 2.8 0.1 0.8 1.8 2.0 Imports, goods and services 12.4 6.0 1.4 -5.3 -1.4 1.3 2.2 GDP, at market prices (supply) 0.8 7.3 2.8 0.9 2.8 2.5 2.6 Agriculture 6.3 3.4 0.4 0.3 1.5 2.6 2.7 Industry -4.1 7.4 1.3 -0.6 4.0 2.2 2.3 Services 5.4 8.0 4.8 2.4 1.9 2.8 2.9 Output gap -1.3 2.5 2.1 0.1 0.2 -0.1 -0.2 Consumer price index, av. 3.8 3.0 2.2 1.9 -0.9 0.5 2.0 Current account balance, % of GDP 2.4 -0.4 -0.9 3.3 8.9 6.4 4.5 Fiscal balance, % of GDP -0.6 -1.8 -0.2 -1.8 -1.9 -2.7 -1.9 Poverty rate (national poverty line) 13.22 12.64 10.9 Poverty rate (US$3.10 a day, PPP 1.17 1.23 0.92 0.89 0.75 0.64 0.54 terms) Sources: Central Bank of Thailand and World Bank staff estimates. Historical fiscal balance based in IMF Article IV. Note: Figures for 2015 are tentative, and may present variations respect to official estimates. Data in annual percentage change, unless otherwise indicated. e = estimate, f = forecast. 33 Thailand Economic Monitor | June 2016 TABLE 5. SELECTED EAST ASIA COUNTRY FORECASTS (Real GDP growth at market prices in percent, unless indicated otherwise) Est. Projections Percentage point differences from January 2016 projections 2015 2016 2017 2018 2015 2016 2017 2018 China 7.7 7.3 6.9 6.7 6.5 6.3 0.0 0.0 0.0 -0.2 Indonesia 5.6 5.0 4.8 5.1 5.3 5.5 0.1 -0.2 -0.2 0.0 Malaysia 4.7 6.0 5.0 4.4 4.5 4.7 0.3 -0.1 0.0 -0.3 Philippines 7.1 6.1 5.8 6.4 6.2 6.2 0.0 0.0 0.0 0.0 Thailand 2.7 0.8 2.8 2.5 2.6 3.0 0.3 0.5 0.2 0.3 Vietnam 5.4 6.0 6.7 6.2 6.3 6.3 0.2 -0.4 0.0 0.3 such a scenario, administrative gridlock may lead and suggests the downside risk of a hard landing to heightened political uncertainties and weigh for China accompanied by global financial on consumer and investor confidence. A third turmoil is falling. risk is that fiscal stimulus runs out of steam as the impact of incentives taper out and large public Tourism receipts is a bright spot infrastructure projects are not implemented on and will drive growth. Inbound tourism, time. An upside risk is that public investments particularly from China, Russia, and the United are implemented more efficiently than expected. States, will continued to rise. The first quarter saw tourism receipts rise by almost 30 percent. Weakening global growth prospects While the potential for more tourism remains, a among both advanced, emerging and shortfall in tourists should growth falter in China developing markets will weigh on Thai will hit the Thai economy hard. In the medium goods exports. Despite the diversity of trading term, supply bottlenecks including infrastructure partners, Thai exports face external headwinds and support service sectors as well as high tourist across all markets. Global growth for 2016 is concentration in certain cities may eventually projected at 2.5 percent. US growth is expected constrain the growth of tourism. to stabilize at 2.3 percent in 2016, providing modest support for global growth. The Euro Rice production is forecasted to area is recovering at a slow and uneven pace of expand from the previous year but remains approximately 1.5 percent over the coming two below the harvests of 2011-2013 due to years. Growth in China may decelerate further Thailand’s worst drought in almost 20 due to slowing investment. However, gradual years. Water levels in the main reservoirs remain domestic rebalancing is underway, as reflected in significantly constrained, following the onset expansion in services sector and consumption, of the El Nino drought and low precipitation in 34 June 2016 | Thailand Economic Monitor late 2014. The Thai Meteorological Department measure of Thailand’s competitiveness across forecasts rainfall to improve over much of the broad measures such as innovation, institutions, country with the beginning of the monsoon technological readiness, education, and business season from late May. As the bulk of rainfed sophistication has declined relative to upper- crop is normally planted from June onwards, middle income economies and structural peers this expected rainfall will benefit planting which include Bulgaria, China, Colombia, operations particularly in the rainfed northern Malaysia and Mexico. and northeastern regions, which account for the bulk of main season output. Although Thailand The stagnation of manufacturing receives more than enough rainfall to meet production is likely to adversely impact its demand each year, drought remains a long- poor urban households with low-skilled term problem. The impact of drought, as well as workers employed in the lower end of the floods, can be mitigated with improved water manufacturing sectors. Rising agricultural management. income in the recent years mainly reflected real increase in agricultural prices and not Inflation is projected to remain productivity increases in agriculture. As low at 0.5 percent, but positive, as the agricultural prices fall back to more normal economic recovers. The first quarter of the levels, growth could become less inclusive, with year saw headline inflation at -0.5 percent the rural poor negatively affected. Constrained primarily due to lower energy prices. Food prices by education and skills levels, a large share of rose somewhat. Commodity prices are projected the poor workers might not be able to reap the to remain low but are not expected to fall further. full benefit of job opportunities in the high-end While inflation remains below the Bank of services sector. As a consequence, poverty is Thailand’s target range the decline in prices has expected to decline at a slower rate in both urban not been broad-based and inflation should move and rural areas. back closer to the range once supply-side shocks from commodity prices abate and the economy The number of poor people recovers. remained broadly unchanged in 2014 but will likely increase in 2015 and 2016 due to Loss of competitiveness in the plummeting agricultural prices. According export and manufacturing sectors, in to latest figures from NESDB, approximately 10.5 addition to a weak global recovery, percent of the population lived below NESDB’s suggests that export growth will remain poverty line, approximately the same proportion negative at 0.5 percent. While FDI continues as in 2013. This corresponds to approximately to grow, lack of investment in new technologies 7.3 million poor people, out of which 5.2 million means that Thai exports will lose market share lives in the north or north east. For 2015 and to competitors. The World Economic Forum’s 2016, there are reasons to be concerned: the main 35 Thailand Economic Monitor | June 2016 FIGURE 18. THAILAND’S COMPETITIVENESS HAS DECLINED RELATIVE TO PEERS 2015 – 2016 2006 – 2007 Source: World Economic Forum’s Global Competitiveness database Structural peers selected for this study: Bulgaria, China, Colombia, Malaysia and Mexico 36 June 2016 | Thailand Economic Monitor factor explaining the large decreases in poverty during the period 2000-2012 was the rapidly increasing agricultural prices. While overall poverty rates remained roughly constant in 2014, there are clear signs that regional poverty have risen, especially in the areas of Thailand where large proportions of households are farmers. For instance, rates in the South where most of Thailand’s rubber is produced rose. Most likely, poverty rates will edge upwards in 2015 and 2016, especially in the South where nearly 60 percent of average household income comes from farming, Moreover, household debt can be expected to increase further as well, as farmers seek to cushion the fall in incomes. Looking ahead, rubber and rice prices are projected to start increasing in 2017 but only at a very gradual pace. As such, farm incomes is likely to remain subdued for several years to come, and will not be the driving force in reducing poverty further. For poverty to reduce further, more productive and better paying jobs are needed, both within the agricultural sector but especially in the higher productive industrial sector. 37 Thailand Economic Monitor | June 2016 C. Policy Watch The current government has the National Competitiveness Committee embarked on an ambitious economic and the People-Public-Private Partnership to reform program for inclusive and propose reforms. sustainable growth by harnessing new engines of growth such as technology, Progress on reforms has already innovation, and services. Long-term reform been made. These include the implementation goals and economic aspirations are laid out of multi-year large public infrastructure projects, in Thailand’s first recent 20-year strategic setting up of a State Enterprise Policy Committee plan for attaining developed country status and a holding company to improve state-owned through economic stability, human capital, enterprise governance, transfer of supervisory equal economic opportunities, environmental oversight of specialized financial institutions to sustainability, competitiveness, and effective the Bank of Thailand, approval of progressive government bureaucracies. The 20-year plan inheritance and property taxes and the launch of will serve as an umbrella for other plans such the National Savings Fund, a retirement safety net as the 5-year National Economic and Social for informal workers. The government has also Development Plan. The ongoing reform program ceased the rice-pledging scheme which incurred encompasses areas such as competitiveness (5 large losses and contributed to labor market S-curve innovative sectors, SME promotion, misallocation. Going forward, the sustained ease of doing business, skills and education, pace and quality of reforms as well as sound special economic zones), tax (personal, implementation will be crucial for translating property, inheritance tax; FDI and SME tax the reform effort into the desired economic incentives), state-owned enterprises (state- outcomes. Continued reforms in additional owned enterprises and specialized financial areas such as education and competition will institutions), infrastructure (rail, road, and air be particularly important to take Thailand from links; integrated water management) and digital middle to high income. economy (broadband access, e-payments for SMEs and online commerce, start-ups). The 1. State-owned enterprises (SOEs) government has set up the National Reform governance. The SOE sector has been Council, the National Reform Steering Assembly, plagued by financial weakness, inefficiency, 38 June 2016 | Thailand Economic Monitor political interference, and sector interests. The bad loans due to imprudent lending. This role State Enterprise Policy Committee (SEPC) is expected to be enshrined in the revised law was appointed by the current government to this year and mitigates the conflict of interest overhaul the structure of state enterprises. The inherent in the previous arrangement in which SEPC will set strategy for SOEs and establish a the Ministry of Finance set strategy for the national holding company to hold the assets of SFIs while also supervising and regulating the SOEs that have clear commercial mandates (i.e. SFIs. This transfer of oversight authority will PTT, Thai Airways International, TOT, CAT, also improve supervision and transparency by Krungthai Bank, MCOT, Transport Co, Airports upgrading the supervisory regime to be more of Thailand, Thailand Post, Thanaluk Pattana line with that of commercial banks. The new Subsin, Bangkok, and Aeronautical Radio of supervisory regime will ensure that the SFI’s Thailand). Other international examples of credit process, corporate governance, and capital such a state holding structure include France’s and liquidity buffers are in line with Basel II Agency for State Holdings, Kazakhstan’s Samruk standards. The MOF will continue to set strategy Kazyna and Singapore’s Temasek. The corporate and nominate executives for approval by the BOT structure provides a clear and transparent while being responsible for losses incurred from framework for investment, commercially- policy lending as identified through, for example, driven restructuring and streamlining, and Public Service Accounts. An SFI Fund will also divestiture and will allow Thailand to better be set up through levies on SFI deposits, similar meet its infrastructure challenges. For example, to the Deposit Protection Agency for commercial the long-pending Suvarnabhumi airport phase banks. The SFI Fund will be used to recapitalize 2 expansion will be implemented by AOT. In SFIs facing financial difficulties. fact, SOEs are responsible for implementing all public infrastructure investment. Legislation for 3. Taxes. Ongoing tax reforms are aimed the holding company is expected to be passed at addressing wealth inequality, improving the soon. One important element of the legislation is competitiveness of the tax structure, streamlining the board selection criteria which will be crucial tax administration and expanding the tax for minimizing political interference and sector interests. The issue of privatization currently remains off the table. 3 Specialized financial institutions are policy banks 2. Specialized financial institutions owned by the Thai government and comprise the Bank for Agriculture and Agricultural Co-operatives (BAAC), the (SFIs) supervision. SFIs comprise around Government Savings Bank (GSB), the Government 22  per cent of Thai financial institutions’ assets.3 Housing Bank (GHB), the Islamic Bank of Thailand, the The Bank of Thailand, by cabinet decree, is now Small and Medium Enterprise Development Bank of Thailand (SME Bank), the Export-Import Bank of Thailand the sole regulator and supervisor of SFIs last (EXIM Bank), the Thai Credit Guarantee Corporation year after several state-backed banks saw rising (TCG), and the Secondary Mortgage Corporation (SMC). 39 Thailand Economic Monitor | June 2016 base. While Thailand’s tax revenue-to-GDP c. Foreign direct investment tax ratio of 17 percent is comparable with other incentives. To boost private investment, East Asian countries and rapidly growing which has been sluggish for several economies, there is still room to expand the years, there will be new tax incentives tax base particularly in light of Thailand’s for Thai and foreign investors offered infrastructure investment plans. by the Board of Investment for ten new special economic zones nationwide. a. Inheritance and gift tax. First According to the BOI, approval was introduced this year, the small inheritance granted to 2,320 projects worth Baht 875 tax (5 percent for descendants above a billion in 2014, with only 38 per cent threshold of 100 million baht) will not of these schemes implemented, while add significantly to fiscal revenue but is a new projects approved by BOI totalled first step in addressing wealth inequality. 362 worth a combined Baht 48 billion this year. To speed up implementation b. SME tax amnesty. Small and of approved schemes, the Cabinet has medium-sized enterprises (SME) total offered more incentives and extended more than 2.7 million or 96 per cent privileges to promoted investors, of Thai enterprises) and account for including those getting approval roughly 80 percent of employment. between January 1, 2014, and June 30, However, many SMEs keep more than 2016. However, international experience one accounting book to evade taxes suggests that the role of incentives in thereby depressing tax revenue and attracting new investment is limited. increasing the size of the unobserved Investors increasingly focus on more informal sector. The Cabinet recently fundamental factors, such as skilled approved a tax amnesty to encourage labor, infrastructure, or intellectual more SMEs to enter the tax system and property protection. reduce the vast informal sector. SMEs will be exempted from income tax for d. The lands and building tax. one year and subject to a reduced rate of The revised Lands and Building tax, 10 per cent for another year if they agree approved by the Cabinet and currently to pay taxes properly in the future and under consideration by parliament, will keep only one accounting book. Possible allow the government to raise taxes future integration of financial record- progressively, expand asset-based tax keeping systems between (and within) revenue, alleviate wealth inequality, companies, banks and the authorities raise land utilization and promote fiscal can lessen loose accounting. decentralization through increased local administration tax revenue. Taxes on 40 June 2016 | Thailand Economic Monitor assets account for less than 5 percent of whom are not covered by government pension, tax revenue. The tax sets ceiling rates of 0.2 social security or private provident funds. The percent of appraisal value for land used government recently implemented the long for agricultural purposes, 0.5 percent for delayed National Savings Fund, a voluntary residences, 2 percent for commercial use matching defined contribution aimed at and 5 percent for vacant or undeveloped covering informal workers aged 15-59, under land. The tax will be levied on first the 2011 National Savings Fund Act. Members homes and land used for agricultural contribute a minimum of 50 baht per month, purposes with appraisal prices starting up to a maximum of 1,100 baht per month, and at 50 million baht, with the rate applied the amount is matched fully or in part by the to the amount exceeding 50 million government. The level of co-contribution by baht. Owners of first homes and farms the government increases with the age of the with an appraisal price below 50 million member. When the member becomes 60 years baht will be free from the tax liability. of age, the accumulated amount of money in the The tax will also apply to second homes individual account will be used for calculating the on a progressive basis, with rates of 0.03 monthly annuity to be paid until death. However, percent to 0.30 percent for homes with take-up remains low at approximately 420,000 an appraisal value of less than 5 million members—mostly self-employed workers in baht to more than 100 million baht. The the agricultural sector and women—probably tax also financially penalizes landowners due to the difficulty of saving amid an economic who leave land sites undeveloped. For slowdown. As Thai society ages, the National vacant or undeveloped land, the tax rate Savings Fund can grow to become an important will be imposed at 1 percent for land left part of Thailand’s social safety net. vacant or unused for 1-3 years, 2 percent for 4-6 years and 3 percent for more Going forward, the sustained than seven years. Earlier versions of the pace and quality of reforms as well as tax drafted under both the current and sound implementation will be crucial for previous governments faced substantial translating the reform effort into the desired opposition from landowners and the economic outcomes. The government’s 20- tax was subsequently watered down. As year strategic plan is envisaged to help ensure such, only 10 percent of homeowners administrative consistency and coordination who own more than one house or own across agencies as well as continuity across houses valued above 50 million baht will governments. Continued reforms in additional be taxed. areas such as public investment management, education and competition will be particularly 4. National savings fund. There are an important to take Thailand from middle- to estimated 25 million informal workers most of high-income status. 41 Thailand Economic Monitor | June 2016 42 June 2016 | Thailand Economic Monitor Box 2. How Could Thailand’s State-Owned Enterprises be Governed? National Holding Companies and International Experience Reform of Thailand’s state-owned and more transparency. The national holding enterprise (SOE) sector is essential to public company is being set up to hold the assets of 12 infrastructure investment and growth. The SOE corporatized SOEs that have clear commercial sector has a long history of financial weakness and mandates (i.e. PTT, Thai Airways International, inefficiency, but at the same time it is expected to TOT, CAT Telecom, Krungthai Bank, MCOT, execute a large, 1.7 trillion baht (13.4 percent of Transport Co, Airports of Thailand, Thailand GDP) infrastructure program during 2015-2022. Post, Thanaluk Pattana Subsin, Bangkok, and Thai SOEs have grown significantly to become an Aeronautical Radio of Thailand). The corporate important part of the economy. Total assets are structure provides a clear and transparent almost at 12 trillion baht or half of state assets, framework for investment, commercially-driven revenue is at 5.1 trillion baht, budget expenditure restructuring and streamlining, and divestiture is at 4.8 trillion baht or twice of the government and will allow Thailand to better meet its budget, and employment is at 425,000 persons. infrastructure challenges. The state enterprise Listed SOEs account for 17 percent of the policy office (SEPO) will act as an advisory body Stock Exchange of Thailand’s capitalization. for the remaining SOEs. Remaining SOEs can SOEs hold and control the country’s strategic be broadly divided into two groups: SOEs that assets: airports, expressways, ports, railways provide large public sector service delivery and and frequency bands. Nevertheless, SOEs face investment agenda as well as SOEs that serve as various challenges arising from structural government agencies. constraints. Political interference, multiple principals, multiple goals, conflict of roles, and Ownership arrangements for SOEs lack of competitive pressure. The state often across the world have steadily evolved toward plays multiple roles as policymaker, regulator greater centralization. Under this model, the and owner. This arrangement can give rise to specialized entity serves as the shareholder conflict of interest and inefficiency. As a result representative with oversight responsibility the State Enterprise Policy Committee (SEPC) for SOEs. Line ministries are responsible for was appointed by the current government to policymaking and the regulatory environment overhaul the structure of state enterprises. in which SOEs operate. Centralization can facilitate monitoring, consolidation, and The national holding company lies at information disclosure across government the heart of the ongoing SOE reforms focused shareholdings thereby increasing transparency on good governance. This centralized ownership and accountability. International examples of arrangement can provide greater coherence this approach include France’s Agency for State 43 Thailand Economic Monitor | June 2016 Holdings and Singapore’s Temasek. Within this t Providing a clear and focused model, two types of centralized entities are widely mandate with a high degree of used: (1) government ownership agencies that autonomy. A clear mandate for the are under the direct authority of the government; entity that focuses on ownership and (2) company-type structures, such as rights, such as board appointments holding companies of investment companies, and oversight, can prevent day-to-day that have separate legal identities and greater interference and leave decision making independence from the government (see table to SOE boards. Chile and Estonia have below). Thailand has chosen the second option put in mechanisms to ensure autonomy. to ensure insulation from political interference as well as financial viability. t Appointing highly qualified professionals. Skilled staff can increase Creating the right governance credibility when dealing with SOE framework and ownership arrangement for boards and management. Singapore SOEs is a global challenge. According to a 2009 and Malaysia have brought in private OECD survey, SOEs accounted for 15 percent sector representatives to the board while of GDP. SOEs remain central economic players removing government officials with in the major emerging markets of China, India regulatory roles. Sweden uses specialized and the Russian Federation. While international consultants. experience suggests that no one ownership model is universally applicable, it is clear that creating t Developing clear ownership a centralized ownership arrangement alone is policies and guidelines. An ownership not be enough to ensure good SOE governance. policy that delineates the roles and Attendant risks include continued political responsibilities of the entities while interference, lack of power and authority and separating policy and commercial lack of capacity. Lessons learned for minimizing aspects, as exemplified in New Zealand, these risks and making ownership entities more can increase accountability. effective include the following. t Ensuring dedicated resources t Ensuring high-level political and building capacity. Skilled staff are support and public attention. In needed to carry the entity’s mandate and Malaysia, the support of the Prime increase credibility in dealing with SOE Minister lent credibility to the Khazanah boards and management. Budgetary and broader SOE reform program. support or independent financial income retained from dividends can help build capacity. 44 June 2016 | Thailand Economic Monitor t Reaching out to line ministries. Coordination with line ministries responsible for regulation is essential to avoid overlap of function and potential conflict of interests while ensuring reform consistency. This issue can be particularly important for banks. t Building in accountability. While ownership entity usually have clear reporting lines, public disclosure of annual reviews, parliamentary oversight, and independent audits can increase transparency and accountability. t Monitoring performance of the ownership entity itself. Many countries have implemented performance- monitoring schemes for the ownership entity in addition to SOEs held in the portfolio. India, for example, has a results framework document for the Department of Public Enterprises for measuring performance against key objectives, targets, and performance indicators and required actions in case of shortfalls. The results are published. 45 Thailand Economic Monitor | June 2016 TABLE TYPES OF CENTRALIZED OWNERSHIP ARRANGEMENTS COUNTRY NAME OF ENTITY LOCATION OF ENTITY OWNERSHIP UNDER GOVERNMENT Ownership ministries Indonesia Ministry of State Enterprise Ministry of State Enterprise Ownership departments in a ministry Finland Ownership Steering Department Prime Minister’s Office France Agence des Participations de l’Etat Ministry of Economy and Finance Norway Ownership Department Ministry of Trade and Industry Poland Department of Public Enterprises Ministry of Treasury South Africa Department of Public Enterprises Ministry of Treasury United Kingdom Shareholder Executive Department for Business Ownership agencies Chile Sistema de Empresas Ministry of Economy China State-Owned Assets Supervision and State Council Administration Commission COMPANY-TYPE STRUCTURE Bhutan Druk Holding and Investments Ministry of Finance Hungary State Holding Company National State Holding Board Malaysia Khazanah Nasional Ministry of Finance Mozambique Institute for the Management of Ministry of Finance State Holdings Peru Fondo Nacional de Financiamiento Ministry of Finance de la Actividad Empresarial del Estado Singapore Temasek Holdings Wholly owned by Ministry of Finance Vietnam State Capital Investment Corporation Wholly owned by Ministry of Finance 46 June 2016 | Thailand Economic Monitor 47 Thailand Economic Monitor | June 2016 Part 2. Promoting Healthy and Productive 4 Aging in Thailand A. The demographic transition Thailand is aging at an The primary driver of rapid aging unprecedented pace. As of 2016, around 11 has been the steep decline in fertility rates, percent of the Thai population, or almost seven with the total fertility rate per woman falling and a half million people, are 65 years old or from around 6.1 in 1965 to only 1.5 in 2015 as older, up from only 5 percent as recently as 1995. a result of rising income and educational levels By 2040, there is projected to be 17 million Thais and the successful National Family Planning 65 years and older, accounting for more than a Program launched in 1970. In the same period, quarter of the population.5 The speed of aging is life expectancy rose from just under 62 years among the fastest seen globally to date. Together old to almost 74.7 years (World Development with China, Thailand already has the highest Indicators). Both indicators can be considered share of elderly people of any developing country positive outcomes of development and supportive in East Asia and Pacific, and it is expected to have government policies. the highest elderly share by 2040. Put another way, the elderly dependency ratio in Thailand An important consequence of these (the percentage of people 65+ relative to the trends is the expected decline in working age working age population) is expected to almost population. Using the standard ILO definition triple from around 15 percent presently to 42 of 15-64 years old, the working age population percent by 2040 (Figures 1 (a) and (b)). 6 of Thailand is expected to shrink by around 11 4 This section was prepared by Philip O’Keefe (Lead Economist) with inputs from Caglar Ozden (Lead Economist), Mauro Testaverde (Economist), Reena Badiani-Magnusson (Senior Economist), and Sutayut Osornprasop (Senior Health Specialist). It also draws on analysis done for a World Bank regional report: Live Long and Prosper, Aging in East Asia and Pacific (World Bank, 2016), and feedback from Miguel Eduardo Sanchez and Kiatipong Ariyapruchya (Senior Economists), Lars Sondergaard (Program Leader) and John Knodel, Research Professor Emeritus, University of Michigan. 5 UN 2015 Population Projections Revision, using the medium fertility rate scenario. Predictions for Thailand in the past have significantly under-estimated the pace of fertility decline (World Bank 2016). NESDB (2013), Population Projections for Thailand, 2010-40 is a useful resource in addition to the UN 2015 revision scenarios which use different fertility rates, migration assumptions, etc. 6 There have been increasing efforts to refine this traditional measure of the elderly dependency ratio to take better account of increases in life expectancy and healthy years of life expectancy, as well as observed labor force participation rates among the elderly, particularly in developing countries. See World Bank (op. cit.) for details. 48 June 2016 | Thailand Economic Monitor FIGURES 1 (a) and (b): THAILAND’S SHARE OF ELDERLY POPULATION IS RISING SHARPLY, RESULTING IN STEEP INCREASE IN ELDERLY DEPENDENCY RATIO (Share of population by age and dependency ratios, 1950-2100) Sources: UN Population projections, 2015 revision. 49 Thailand Economic Monitor | June 2016 FIGURE 2. THAILAND IS AGING AT MUCH LOWER INCOME LEVELS THAN OECD AND ITS OLDER NEIGHBORS (GDP per capita 2005 PPP and elderly dependency ratio) Source: World Bank (2016) percent as a share of the total population between now and 2040, with an even sharper decline in terms of absolute numbers from just under 49 million to around 40.5 million people. In terms of population share, the forecasted decline in working age population is higher in Thailand than any developing EAP country in the period (even higher than China). 50 June 2016 | Thailand Economic Monitor The other notable feature which Thailand shares with a number of its developing Asian neighbors is that it is aging rapidly at a relatively low level of GDP per capita. While Thailand is a solidly upper middle income country, compared to rich East Asian countries and those of the OECD, it is aging at a much lower income level, suggesting that fiscal and administrative capacity to address aging is likely to be constrained (Figure 2). The speed of demographic transition in Thailand poses new challenges for policymakers, employers and citizens, but also opportunities. Aging will require policy action and behavioral change in a number of areas. In labor markets, the challenge is to mitigate the structural decline in working age population and to enhance labor productivity of the shrinking labor force. In fiscal terms, the biggest risk will be pension spending, but there are significant challenges also for healthcare and aged/long- term care systems to ensure affordable care for all in a sustainable manner in a context of rapid aging. At the same time, aging offers expanded opportunities for Thailand as a provider of services to the growing elderly population across the region. The following sections first discuss the living situation of older people in Thailand and then the key policy challenges presented by aging, before a short discussion of emerging opportunities. 51 Thailand Economic Monitor | June 2016 B. The living situation of elderly Thais Older Thais are on average elderly parents providing care for grandchildren significantly more likely to live in poor and older grandparents (Knodel at al, 2015). households than working age individuals. Individuals over the age of 60 are around 45 Despite their relatively high poverty percent more likely to live in poverty than and co-residence rates, elderly people individuals aged between 15 and 50, and this in Thailand – especially rural elderly – rises to around 60 percent more likely for tend to work till advanced ages, but there people 75 and over (Figure 3). A second notable is significant variation by location and feature is higher child poverty rates, which may gender (Figure 5). Overall a considerable share be driven in part by the prevalence of “missing of Thai elderly work beyond the global definition generation” households where grandparents of “working age” (up to age 64). But the variations are the primary carers for grandchildren in the across categories of elderly are notable. At age absence of parents. 65, around three quarters of rural men are still working, often in agricultural activities, while While many older Thai people co- only around one third of urban women are reside with their adult children, the co- working at the same age. Even more strikingly, residence rate has fallen steadily in recent around 40 percent of rural men are still working years, with just under 60 percent co-residence at age 75, suggesting that a significant share of among those 60 and older with at least one adult elderly “work till they drop” (Giles and Huang, child as of 2014, down from almost 80 percent 2015). Other research which uses the Thai Survey in 1986 (Figure 4). Globally, there is a pattern of of Older Persons also suggests that the share of co-residence rates falling as countries become those 70-74 years of who are working increased wealthier, and Thailand is no exception. At the by around 45 percent between 1994 and 2011 same time, it is important to take account of adult (Knodel et al, 2013). children living nearby, which survey evidence indicates may have quite similar welfare effects The importance of own labor as for the elderly parents in terms of likelihood of the main source of support for elderly financial support and shared caring roles, both Thais is confirmed by comparing the adult children providing care to parents and share of people relying on different 52 June 2016 | Thailand Economic Monitor FIGURE 3. OLDER PEOPLE HAVE SIGNIFICANTLY HIGHER POVERTY RATES Percent of individuals living in poor households in 2013, by age Source: SES, 2013 FIGURE 4. CO-RESIDENCE WITH CHILDREN OF THAIS AGED 60 AND OLDER WITH CHILDREN REMAINS SIGNIFICANT BUT IS FALLING Co-residence and location of nearest child, 2014 Cumulative percent Percent in category Location of nearest child Source: Knodel et al, 2015, based on Survey of Older Persons in Thailand 2014. 53 Thailand Economic Monitor | June 2016 FIGURE 5: MANY THAIS HAVE LONG WORKING LIVES, ESPECIALLY IN RURAL AREAS AND AMONG MEN (share of people working by age, gender and location, 2011) Source: Giles et al for World Bank (2015). income sources for their primary source by children or other relatives (around 96 percent: of support (Figure 6). Almost 60 percent of Knodel et al 2013; Knodel et al, 2016). people over 60 years old report their own labor as their primary source of support, in both rural and A further important point to note urban areas. In contrast, only around 10 percent with respect to provision of financial and of rural people and 12 percent of urban people care support is that elderly people are also report public transfers as their primary source a significant source of support and care. In of support, despite the existence of an almost- 2014, around 17 percent of people 60 and older universal social pension from age 60, reflecting reported providing financial support to their the relative modesty of the transfer. Perhaps more co-resident children in the previous year and 11 surprisingly, the share of elderly reporting private percent to children not residing with them (Knodel transfers from family and friends as their primary et al, 2015). Furthermore, 15 percent of Thais 60 source of financial support is not much higher, and over report having a co-resident grandchild though other sources suggest that a high share of with absent parents due to migration or other Thai elderly receive some financial support from reasons, and in the large majority of cases are the their adult children (between 82 and 86 percent primary care givers. This is a dynamic which is depending on residence location of children, likely to grow with increased urbanization, though Knodel et al, 2015), and non-financial care will be counter-balanced by very low fertility rates support is overwhelmingly provided primarily among reproductive age couples. 54 June 2016 | Thailand Economic Monitor FIGURE 6. AS IN MUCH OF DEVELOPING ASIA, MOST OLDER THAIS RELY ON THEIR OWN LABOR AS THEIR PRIMARY SOURCE OF SUPPORT (Primary source of support for people 60 years+. Rural top panel; urban bottom) Source: Giles et al, 2015 for World Bank based on Thai SES 2011 for Thailand. 55 Thailand Economic Monitor | June 2016 A distinguishing feature of Thailand While healthy years of life relative to some other EAP countries (such expectancy have increased for older Thais as China) is the low rate of household in recent decades, the burden of non- savings and significant levels of household communicable diseases has increased debt. A common concern in aging societies notably. The impacts can be seen in data on is that savings rates may decline as a result of functional limitations of Thai people, which older people dissaving as their labor incomes increase sharply with age after 60 (Figure fall. The evidence on this effect is mixed in EAP, 7). While less than one fifth of Thais have a but it is clear that Thais are not currently saving functional limitation at age 60, this rises to over enough to assure a comfortable old age. Thai net 40 percent for the 70-74 year old group and household savings rates are low at 4.88 percent almost three quarters of people 80 and over. of GDP at end-2014, and have fallen from just The steep increase in functional limitations is under 12 percent of GDP in 1980 (Pootrakool et observed across developing EAP (World Bank, al, 2005). This is reflected in income sources in 2016). Such a pattern generates rising needs for old age. Figure 6 shows the low level of “other care and support as people age. Among those 60 income” (which includes drawing on savings and over, 8.5 percent report needing assistance and asset sales) as a primary source of old age with activities of daily living, and this raises support. This is confirmed by the Thai Surveys to almost one quarter of those 80 and older. of Older Persons. In 2014, only 3.8 percent of Among those who report a need for care, around people 60 and over reported savings, interest, 36 percent of those 60 and over say that they are and/or property income as their primary source not receiving assistance, reflecting a significant of support, the share was only 2.6 percent in rural “care gap” in Thailand that is evident in other areas (Knodel et al, 2015). In addition, household parts of developing EAP (Knodel et al, 2015; and debt levels are fairly high, at just under 80 percent Research Base, 2012). of GDP outstanding loans to households and a debt service ratio of 26 percent. 7 Thais clearly A final important and interesting do not have significant savings stocks in old age, dimension of aging in Thailand relates and the economy-wide household net savings to expectations on sources of support in rate suggests that this is unlikely to change old age. This has two aspects. The first is the quickly (particularly given generally low levels apparent difference between what people expect of financial literacy) and demonstrates the need in practice to be their primary source of support for enhancing savings for old age. and what they ideally would like to see as the 7 World Bank staff estimates based on CEIC, NESDB and BOT (2015) for household debt to GDP ratio, and Muthitacharoen (2015) for debt service ratio, defined as household debt payments/household disposable income. 56 June 2016 | Thailand Economic Monitor FIGURE 7. FUNCTIONAL LIMITATIONS INCREASE SHARPLY WITH AGE IN THAILAND (Functional limitations by age, 2014) Source: Knodel et al (2015) based on Survey of Older Persons in Thailand 2014. FIGURE 8. THAIS WOULD PREFER THE STATE TO PLAY A BIGGER ROLE IN OLD AGE SUPPORT IN FUTURE Percentage by source of who should ideally be primary source of old age support Source: Jackson and Peters, 2015. 57 Thailand Economic Monitor | June 2016 future source of support. In this regard, around 77 percent of people expected themselves (own work) or family members to be their main source of support in old age, according to the Thai Survey of Older Persons (Knodel et al, 2013). In contrast, a recent survey that asked who ideally should be the primary source of support on old age, around two thirds of adult Thai answer “government” (Figure 8). The second aspect on expectations is an apparent divide across generations on the expected role of children in supporting the elderly. The second point is that only around a quarter of those 18-39 expect their children to be their primary source of support in old age, while the share rises to 38 percent for those 50-59, suggesting that there are divergent expectations around old age support which could presage a need for greater public policy support in future (Knodel et al, 2013). 58 June 2016 | Thailand Economic Monitor C. Some Policy Options for Responding to rapid aging in Thailand The rapidly changing demographics Senior Citizen’s Council of Thailand. 9 of Thailand pose a number of challenges for policymakers and society more broadly. A key insight from countries in Asia At the macro level, there are concerns about and beyond is that the risks to growth and possible impact on future economic growth due fiscal positions of aging are real, but that to impacts in the labor market and other factors policy choices and behavioral responses such the potential impacts of aging on household by employers, households and individuals savings rates. There are also fiscal risks that have very important effects on how the risks accompany rapid aging, with rising pressures on from societal aging are navigated. This section the pension system, impacts on health spending, discusses the policy options available to Thailand and emerging needs for a public sector role in and their potential for helping to mitigate aged and long-term care as traditional support negative economic consequences of rapid aging. networks come under increasing stress. At a macroeconomic level, Thailand has a reasonably well predicting the impacts of aging on growth elaborated high-level policy framework with any precision is difficult, as behavior on aging, though financing and and policies change in aging societies. Previous implementation continues to present work by ADB using a growth accounting significant challenges. National policy is most model predicts that the effects of demographic recently reflected in its Second National Long- change in Thailand do not weigh on growth in term Plan for Older Persons (2002-2021) and the current decade, but that aging will have a the earlier Act on Older Persons 2003. There is negative impact on economic growth during the also national evaluation and monitoring of the 2020s and beyond.10 Others using an overlapping Plan for Older People which includes public and private organizations and the members of the public, and a National Commission on the 8 HelpAge International, Review of national policies Elderly. 8 There is also a wide network of older and institutions for aging in EAP (2015a). 9 HelpAge International, Community-Based Social Care people’s associations (OPAs), with over 23,000 in East and Southeast Asia (2015b). OPAs in Thailand in 2012 organized under the 10 Park and Shin, ADB, 2011. 59 Thailand Economic Monitor | June 2016 generations (OLG) model raise concerns about (i) Responding to aging in the labor the impact of aging on Thailand’s growth due market: to the different occupational and productivity profiles of younger and older Thais, with older Looking at the labor market, people being much more likely to be in lower there are a range of policy measures and productivity self-employment and thus likely behavioral responses which can help to declines in output per capita as the population mitigate the pure demographic effects that ages. 11 would otherwise result in a declining labor force over time. These include measures to impact total However, much is dependent on size of the labor force and the quality of future assumptions about labor force participation workers. A key insight from global experience and how savings behavior and total factor is that labor market policies to address rapid productivity (TFP) evolve in response to aging are not just about old people, but require aging. If, for example, formal sector retirement policy interventions across the life cycle. More ages are delayed, the occupational effect may be specifically, measures which Thailand could diluted. Equally, a given level of capital investment focus on would include the following: in the economy with a smaller workforce should result in higher productivity per worker. Finally, First, the potential for increasing evidence and projections for other parts of Asia female labor force participation is suggest that the negative compositional effect on significant. As in many countries, female the savings rate from an older population may be labor force participation in Thailand remains more than offset by positive behavioral impacts significantly below that of males currently. While as people save more during their working lives in the gender gap in labor force participation is not anticipation of a longer old age. as pronounced as some countries in EAP such as the Philippines, women in both rural and Rather than aiming to predict growth urban areas are significantly less likely to be in impacts precisely, this section focuses on some paid work outside the home (Gender WDR EAP key areas of policy where action is needed Companion report, 2014). Gradually closing this whatever the growth impacts: labor markets; gap would be the single most effective measure pensions, healthcare, and age/long-term care. to offset the structural decline in working age population. However, progress is challenging. Apart from direct efforts in the labor market, such as efforts to close the gender pay gap 11 Arayavechkit, Manprasert and Pinthong (2015). 60 June 2016 | Thailand Economic Monitor (which is more pronounced in agriculture and withdrawal from the labor force across East Asia industry in Thailand), it will be vital to improve (Giles and Huang, 2015). While such reforms are the functioning of childcare and eldercare politically challenging, they only become more services, both of which have been demonstrated so if delayed and eventually have to be done less to have significant effects on female labor force gradually. participation in older countries (Thevenon, 2013). With respect to childcare, public investments Apart from retirement age, there is are likely to be necessary, whether directly into a range of measures at firm level that can subsidizing childcare services or perhaps through help to extend productive working lives other channels such as providing extended-day and make older workers more appealing kindergarten and primary school services (as for to employers. One is reduction in seniority- example Vietnam is already doing in extending based wage setting mechanisms, which make the kindergarten day). older workers less attractive and are typically not linked to worker productivity. A second area is A second area for potential policy promoting flexible work arrangements such as reform and behavioral change by firms is part-time, flexi-work and job-sharing, measures extending productive working lives. Given which are attractive to both older workers that many Thais already have long working lives, and employers and promote a “glide” into this may not yield the same level of labor market retirement rather than an abrupt withdrawal. impacts, but is important also for fiscal reasons A third, and very cost-effective, intervention is and due to the fact that longer working lives simple adjustments in the workplace to make appear to delay cognitive decline later in life. The them more suited to the physical capacity of primary focus for extending working lives should older workers. Experience in countries such be the urban formal sector. A key measure in this as Germany and Japan suggests that simple regard is gradual increase in official retirement workplace modifications such as lowering work age, which is 55 in the private sector and 60 in the benches, improving access and the like pay for public sector (though planned to be increased themselves quickly. to 65 for the latter 12). This is presently low in Thailand relative to life expectancy at age 55 A third, and inevitably sensitive, (which is around 23 years for men and 27 years area to address structural decline in the for women – World Bank 2016). Regression labor force is to promote more immigration, analysis indicates that availability of a formal an option that seems especially relevant to older sector pension is significantly correlated with EAP countries which have neighbors with 12 http://www.bangkokpost.com/news/general/912280/civil-servants-to-retire-at-65 for report of announced increase in civil service retirement age. 61 Thailand Economic Monitor | June 2016 FIGURE 8. WITH A SET OF LABOR MARKET REFORMS, THAILAND HAS THE POTENTIAL TO MORE THAN OFFSET THE STRUCTURAL DECLINE IN LABOR FORCE DUE TO DEMOGRAPHIC CHANGE Simulated labor force size under different policy scenarios, 2010-2050 Source: Bank staff estimates, based on Ozden and Testaverde for World Bank (2015). Note: (a) LF participation rate from Labor Sta, ILO. Assumptions: (i) female labor force participation rate converges annually at 1/40th of initial gap with male participation rate; (ii) permanent migration assumes immigration of 10% of labor force 25-35 in Thailand who never leave and assume fertility behavior of locals; (iii) temporary migration assumes immigration of 20% of local labor force aged 25-35, that immigrants stay for 10 years and have 100% LF participation; (iv) elderly participation increase assumes convergence of LF participation for 60+ population to Indonesian levels by 2040; and (v) baseline assumes current five year age cohort LF participation rates remain stable and changes the size of cohorts in line with total population projections. much younger populations. The deepening of Looking at the measures above, economic integration in ASEAN should support Figure 8 provides a simplified simulation such a policy direction, though over time of the potential impact on the labor force would be expected to focus more on increased size in Thailand over a 40 year period from immigration of workers beyond the highly 2010. Each of the measures outlined above has skilled. Another distinction in thinking through significant potential to mitigate the decline in future migration policies in the context of aging labor force. In the short run, migration (whether is that temporary and permanent migration have temporary or permanent) has the most immediate somewhat different effects on labor force size. positive impact, but by around 2030, increase In the short term, temporary migration would in female labor force participation becomes the provide a higher increase in labor force size, single most significant mitigating measure and but within 10-15 years, permanent migration easily dominates by the end of the projection provides a more significant positive impact on period. Over time, extending working lives also the labor force. has some impact. While no measure on its own 62 June 2016 | Thailand Economic Monitor would be a panacea to demographic change, (ii) Pensions: the combination of measures could result in a larger labor force across the entire period than Rapid aging increases the demand the baseline no-reform scenario. This is not to for wider coverage of the pension system in under-estimate the political and social challenges order to provide adequate old age financial of the simulated reforms, but demonstrates the support, but also poses challenges of fiscal potential for sensible policy change to mitigate sustainability. Thailand has made significant the labor supply challenges of aging. progress in coverage of its social pension, but the level of the benefit remains modest. At the A final area where Thailand has same time, the country faces significant financial significant potential to address a declining sustainability challenges in existing contributory working age population is sustaining schemes and – like many middle income improvements in human capital acquisition countries - continues to struggle to expand the and thus improving labor productivity. formal sector schemes. Thailand has already made major strides in improving educational attainment in recent Thailand’s formal sector pension decades, with the share of its population aged schemes were introduced fairly late in 20-64 with secondary education or higher rising the demographic transition, but already from only 21 percent in 1990 to a projected two face a number of challenges. With respect thirds by 2030 and over three quarters by 2040. to the formal sector pension schemes, Thailand While this is a major achievement which should introduced a national mandate only relatively late help to enhance productivity and partly offset in its demographic transition after it had crossed the quantity decline in labor force size, it will be the threshold of 7 percent “aging” society. This vital that educational attainment is more fully was later relative to demographics than any other reflected in improved learning outcomes which EAP economy, with the exception of Hong Kong, more properly reflect human capital acquisition SAR China. Given the late introduction, the Thai and will drive future labor productivity formal pension system remains immature to date, increases. Recent evidence on learning outcomes with an average replacement rate in 2013 of just in Thailand suggest reason for concern in this over 30 percent of wages, though this will rise as regard, with around 32 percent of young people the scheme matures. However, the contribution aged 15 functionally illiterate, rising to 47 percent rate of only 6 percent of salary places Thailand in village schools.13 While Thailand would in any among the very lowest contribution countries event want to improve these outcomes, the reality globally, and pension adequacy looks likely to of rapid aging gives an added note of urgency to improvements in educational quality. 13 World Bank (2015): Thailand: Wanted - A Quality Education for All. 63 Thailand Economic Monitor | June 2016 FIGURE 9. THAILAND’S FORMAL SCHEMES WILL FACE SIGNIFICANT SUSTAINABILITY ISSUES AS THEY MATURE Actual contribution rate and “break-even” contribution needed to sustain financial balance Source: OECD (2013) and Palacios (2015) for breakeven contribution rates. The Japanese contribution rate refers to 2017. remain a challenge. In addition, civil servants percent of GDP on its formal pension schemes continue to have a separate scheme which is in 2010 (the latest year for which data are much more generous than the private sector. publicly accessible), the combination of factors noted above suggests either that the scheme As a result of their relatively recent will continue to face challenges of adequacy introduction, Thailand’s spending on of financial protection for the elderly and/or formal pension schemes is well below what sustainability challenges. The retirement age might be expected for a country with its of 55 in the private sector is remarkably low elderly share, but the system nonetheless for a country with Thailand’s life expectancy at faces significant sustainability risks over retirement, and – together with low contribution time. While Thailand spent only around 1-1.2 rates and a defined benefit design – points to the 64 June 2016 | Thailand Economic Monitor FIGURE 10. COVERAGE OF THAILAND’S FORMAL SECTOR PENSION SCHEMES REMAINS LOW Active contributors to contributory pension schemes as % of labor force, early 2010s Source: WB pensions database, accessed March 2016. Thailand for 2009. likelihood of significant sustainability challenges of general budget support and/or higher as the scheme matures.14 This can be seen in contributions in future. Figure 9, which shows the pension contribution rates for various EAP countries which would While contributory pension be needed for the scheme to break even in schemes face significant adequacy and financial terms, and where the gap for Thailand sustainability challenges, there is also a is largest, pointing to an emerging funding gap major challenge of under-coverage (Figure if the scheme continues to rely on contribution 10). For the most recently available year, revenue only. This is not to suggest that Thailand coverage of formal sector pension schemes was increase its contribution rate significantly, but only 22.5 percent of the labor force (and around will require reform either of entitlements and/or 18 percent of working age population).15 While of pension financing through some combination this is not out of line with other countries at 14 While previous actuarial analysis suggests that the scheme would not encounter deficits till around 2040 (Yamabana, 2011), this is largely due to its immaturity, and other commentators highlight a range of sustainability challenges, with Allianz Asset Management rating it lowest on its Pension Sustainability Index 2014. http://www.nationmultimedia.com/business/Thailand-advised-to-raise-retirement-age-30273718.html. World Bank (2016) also points to significant sustainability challenges in formal schemes as they mature. 15 The coverage figure is from 2009, which is the latest year for which an official coverage number is available. 65 Thailand Economic Monitor | June 2016 Thailand’s income level globally, the very rapid (Paweenawat and Vechbanyongratana, 2015) pace of aging in Thailand makes the urgency and relatively limited impacts on poverty for the of improving coverage more acute, as the large majority of beneficiaries (Badiani-Magnusson, majority of people have only a modest social forthcoming). pension. Another feature of Thai pension In contrast to formal sector policy in recent years has been the schemes, Thailand is notable for the introduction of matching defined widespread coverage of its social pension, contribution schemes (MDC). MDC schemes which is available to anyone without a formal provide a public subsidy to people – typically sector pension from age 60 onwards. 16 The in the informal sector and self-employed pension level is modest at TBH 600 per month workers - to incentivize them to make pension for those 60-69, but rises with age to THB contributions, with matches globally ranging 700 for those 70-79, THB 800 for those 80-89 from around 30 percent of the contributed and THB 1000 for those 90 and over. When amount to a one to one (100 percent) match. introduced the benefit was poverty targeted, but The most recent MDC scheme in Thailand is the was made “pension-tested universal” in 2009 (i.e. National Savings Fund which started operation anyone not receiving a formal sector pension in 2015, and matches contributions at 50 percent is eligible from age 60 onwards), and coverage for those 15-30, gradually rising to a 100 percent is very high as a result (Figure 11). As in most match for those 50 and above, with annual caps EAP countries outside the Pacific Islands, the on the match. There have been various efforts of basic social pension level remains relatively different Thai governments to increase old age modest at no more than 5 percent of per capita savings. 17 It is too early to say what penetration income. Not unexpectedly, only around 11 might be achieved over time, as take-up to date percent of elderly report the social pension as has been modest at only around 400,000 out of their primary source of income (Suwanrada and an estimated 30 million informal sector workers, Wesumperuma, 2013). Also not surprisingly but the basic model of MDC seems worth given the modesty of the benefit, the social pursuing as an element of Thailand’s long-term pension has been shown to have insignificant pension system.18 impacts on the labor force supply of elderly Thais 16 Though SES analysis suggests that a significant portion of eligible households do not start receiving payment till age 61 or even 62 for reasons that may relate to implementation challenges. See Badiani-Magnusson (forthcoming). 17 Wiener (2013) in Hinz et al (2013) and World Bank (2012) provide detailed analysis of Thai MDC schemes, including both the NSF and the earlier schemes under Article 40 of the Social Security Act. 18 http://www.nsf.or.th/index.php/2016-02-09-14-38-50/2016-02-10-01-11-03/121-more-than-400-000-join-national- savings-fund 66 June 2016 | Thailand Economic Monitor FIGURE 11. WHILE SOCIAL PENSIONS IN THAILAND HAVE VERY WIDE COVERAGE, THEY REMAIN MODEST Social pension coverage of 65 and over and benefit as share of pc income, latest available year Source: World Bank (2016) Given the challenges posed by rapid aging the official retirement age, and Thailand could to Thailand’s pension system, the government consider such an approach (World Bank, 2016). may want to consider a linked set of reforms, including: More broadly, there is a structural question on how to finance Thailand’s Adjusting retirement ages to formal schemes as they mature. If the changing life expectancy would be an preference is to keep the contribution rate low important measure to continue, especially for reasons of labor market competitiveness, in the private sector. There will be ongoing there is likely to be an increased need over time needs to reform the formal sector pension for supplementary general revenues financing schemes to balance a reasonable degree of benefit and/or a need for significant expansion in private adequacy (typically considered as being a 40- voluntary old age savings to ensure adequacy 50 percent replacement rate) while improving of retirement incomes. On the latter, this will financial sustainability. In this light, an increasing involve questions of tax treatment of savings number of aged countries have introduced instruments or other incentives, regulation different forms of automatic linkage between and management of schemes, and appropriate increases in life expectancy at retirement and portfolio rules, though it is also important to 67 Thailand Economic Monitor | June 2016 have realistic expectations, as no developing would experience from India’s schemes for EAP country as yet has significant penetration informal workers, and countries in Latin of voluntary private pensions to date. 19 There is America such as Mexico, Colombia and also likely to be a sustained need for awareness Peru. The Chinese scheme for rural and urban raising and financial literacy efforts on the part of informal workers is particularly innovative, government and the private sector to encourage combining a low matched contribution to an higher savings for old age over time. individual account (at a minimum of around USD 15 equivalent per year, matched at 30 The Matching Defined Contribution percent) with a “basic pension” which is paid for approach may need from further refinement life from age 60 after 15 years of contributions. In and improvements in administration. The practice, the total public subsidy to the informal MDC approach seems worth persisting with, worker comes to around 80-85 percent of the including properly evaluating the impact of the benefit stream after retirement, thus combining tiered level of matching subsidies on take-up features of both MDC and social pension. More of different groups and on other factors such generally, the global experience suggests that as incentives to participate in formal pension keeping MDC design fairly simple and easy schemes. Apart from design issues, the biggest to explain to informal workers is important, challenge of such schemes is administration. with flat or simple tiered contributions, flexible Collecting and matching contributions from payment periodicity, and simple pension benefit informal sector or self-employed workers structures preferable to schemes which aim is challenging, and the record keeping and – often fruitlessly – to measure the income of account management challenges are daunting. informal workers. 20 A focus on simplifying Experimentation with different channels for administration has also been key, with potential aggregating workers and facilitating collections roles for grassroots aggregators such as unions, will be necessary, as will developing efficient microfinance institutions, and self-help groups mechanisms for account management and in mobilizing contributions from members. investment. Thailand’s social pension seems The recent MDC experience a sensible response to the challenges of of China, which has brought over 400 expanding contributory schemes, but the million informal workers into a subsidized social pension alone will not substantially scheme since 2010, may be instructive, as reduce old age poverty at current levels. 19 The coverage figure is from 2009, which is the latest year for which an official coverage number is available. 20 See Hinz, Holzmann, Tuesta and Takayama (eds), 2013. Matching Contributions for Pensions: A Review of International Experience, World Bank, and Dorfman et al (2013) in that collection for details of the China scheme. 68 June 2016 | Thailand Economic Monitor At the same time, given the high coverage, developing country neighbors. Thailand has significant increases in the real value of the focused on “Healthy Aging” for more than 20 years benefit would need to be carefully assessed over and includes a number of targets with respect to the medium to long term to assess fiscal space. health in the Second National Long-term Plan An intermediate approach to consider may be for Older Persons (2002-2021). More generally, to provide for a supplement to the basic social Thailand has achieved universal coverage under pension for the elderly poor (i.e., focusing one of its publicly-managed health insurance any increased allocation to the scheme on the or benefit schemes. This has broadened access poor only), or alternatively to consider a more to health services, contributed to higher and generalized poverty-targeted cash benefit for more equitable patterns of utilization, and poor households, irrespective of age. While helped reduce the financial burden associated either of these approaches would help to balance with health care costs. As a result, compared to improved old age financial protection with fiscal neighboring countries, the share of Thai elderly considerations, the major constraint at this point who experience catastrophic health spending is that Thailand lacks a robust household level each year is much lower, at only around 2-4 targeting mechanism to identify the poor. This percent (World Bank, 2016 and World Bank is quite unusual for a country at Thailand’s level 2015). More specifically, there are features of the of development, and most neighboring countries Thai system which are particularly well-suited to have such mechanisms in place, including an aging population, including case-based and Cambodia, China, Philippines, Indonesia capitation-based provider payment mechanisms, and Vietnam. There has also been an active and an active purchaser in National Health discussion underway in Thailand on whether a Security Office (NHSO) which is a regional negative income tax could be used to support the leader on review and the adoption of new drugs poor. In economies with large informal sectors and technologies. This is especially important and where tax declaration is limited, there is a with aging society, as older people tend to have risk that targeting on the basis of tax filing will higher pharmaceutical consumption and the miss a substantial portion of poor people who cost-effectiveness of medical technology in late- fail to file taxes. Development of a household life care can be a key driver of system spending. targeting mechanism in Thailand would be advisable under any circumstances, but may have At the same time, there remain particular urgency in the context of rapid aging. challenges of healthcare access and affordability for older Thais. While older (iii) Health and aged/long-term care: Thais are on average in a better position than their peers in neighboring developing countries, In the area of healthcare, Thailand’s evidence suggests that there may be significant system is in several ways better prepared unmet demand for healthcare, especially among for an aging population than many of its the very elderly and among poorer elderly 69 Thailand Economic Monitor | June 2016 FIGURES 12 and 13. UTILIZATION RATES SUGGEST SIGNIFICANT UNMET DEMAND FOR HEALTH SERVICES AMONG THE OLDER OLD AND POOR ELDERLY PEOPLE Utilization of OP care by age (LHS) and by income quintile and location (RHS) Sources: HISRO for Figure 12 and SES 2011 for Figure 13. people. Figure 12 shows this with respect to age, are: (i) costs of transportation to facilities (both with a sharp fall-off in utilization of outpatient for the patient and for the caregiver they often care around age 80 on average, but where further need to accompany them), especially in rural analysis shows that the drop-off is confined to areas, where average transport costs to health those in the UC scheme, while those in the civil facilities among rural elderly were over THB 6000 service scheme increase their utilization as they per year in a recent study (World Bank, 2015); age (a similar pattern holds for inpatient care). (ii) food for both patient and caregiver, again Figure 13 shows that utilization of outpatient higher among rural patients who must often be care by poor people 60 and over remains well away from their homes for longer periods; (iii) below that of better-off elderly people (World accommodation costs for rural elderly when Bank, 2015). seeking care in regional hospitals, which may be up to 7 hours travel from their homes and There is a range of non-medical costs thus require accommodation even for outpatient associated with seeking care which appear visits; and (iv) medicines which are outside to be limiting affective access to services, the national essential drug list. Survey findings especially for the rural elderly. Recent were confirmed by qualitative work, which also research on healthcare usage finds that the main stressed the challenges of accessing care for those causes of older Thais not seeking medical care who did not have family members to accompany 70 June 2016 | Thailand Economic Monitor them to health facilities and stay with them in case courses, and significant shortages of nurses aides of inpatient care (World Bank, 2015). Some local and related caring professionals. administrative organizations (LAOs) in Thailand also provide health emergency vans in their In contrast to healthcare, which localities free of charge. While some large public can be considered a strong area of Thai hospitals have social welfare schemes that assist public policy, the policy framework for with some of these costs, they are institution- aged and long-term care remains nascent. specific and awareness among potential users is As noted, there is a growing demand for age- often low. related care in Thailand and a significant deficit in care provision, both formal and informal. This A further issue for the Thai health impacts not only the welfare of elderly Thais, but system as society ages is the evolving service also has impacts in the labor market in terms of needs among the elderly, and the extent to impacts on working age adults who may have which the universal coverage (UC) basic to withdraw from paid work or reduce hours to package is able to afford and/or is likely to provide care. prioritize such services. Aging imposes new or increased demand for certain types of services, There have been several initiatives a number of which are not presently covered in for the home- and community-based the UC service package. For example, there is no elderly care, but Thailand to date lacks coverage of dementia drugs in Thailand, though an elaborated strategy for aged and long- 7 percent of those 60-69 years old are affected term care. Under the “Friends Help Friends” by dementia and around one third of those 80 Initiative, older people’s groups receive public and over. There are several other examples of funding to train volunteers to provide support for treatments that are disproportionately consumed frail, dependent elderly people, with volunteers by the elderly and for which demand is thus often from among the “younger elderly”. Services likely to rise sharply in coming years, including include health information and basic healthcare some medical equipment for knee and hip support, rehabilitation and social support. The replacements, hemodialysis, and certain cancer Government has also experimented in recent treatments. There will clearly be a need for NHSO years with a rural caregivers program, under to assess the medical priority of such treatments which community members in rural areas are in future, their relative cost-effectiveness, and paid a modest monthly stipend to cover some their affordability given the sometimes high unit costs of providing care for frail elderly without costs. This will involve difficult trade-offs given support. In addition, Thailand provides tax relief the financing constraints on the UC system. In for family caregivers, though this would tend addition to financing, there is a large gap on the to benefit better-off households already in the provider side. Thailand has no formal training tax net. 21 However, overall there is not a well- for clinical specialists in geriatrics beyond short elaborated government strategy for aged and 71 Thailand Economic Monitor | June 2016 long-term care which spells out the respective elderly. There is also potential for innovations roles of the state, non-state providers, the market, such as “time banks” which are being used in communities and households, and outlines a parts of China for example. 23 sustainable financing strategy for the sector. Carry out an assessment of the costs Focus areas for future policy in and benefits of expanding UC-covered Thailand with respect to healthcare and services related to conditions of old age, aged- and long-term care include the in particular dementia-related treatments, 22 following four sets of policies. hemodialysis, and some cancer treatments. While there will inevitably be trade-offs with other First, consider including selected health sector priorities, it would be important to non-medical costs of health treatment take into account the costs of care provision by in the package of services under the UC family members and others who might otherwise package, in particular a transportation allowance be in more productive forms of work if elderly for elderly without caregivers in rural areas. health conditions could be more affordably Poorer countries in the region already provide managed. Even if UC coverage is partial, there is some allowance for costs of transportation to scope to expand training of local providers and health facilities, including Cambodia and Lao VHVs in use of home visits materials developed PDR under their Health Equity Funds. If costs by the government under its Elderly Mental considerations make inclusion of such support Health Care Systems Project. difficult, an option would be to provide non- medical allowances to either the poor elderly Elaborate a national aged and only and/or those judged to have a high degree long-term care strategy which is built of frailty and need. around home- and community-based care and which has a clear financing strategy Second, promote outreach and mixing public and private resources. Aged home-visit services by community health and long-term care will most likely be an area workers and village health volunteers where financing is mixed, where provision is (VHVs) for the frail and housebound often outside the public sector, and where a clear elderly to reduce the need for facility visits. policy is vital to avoid the problem of many older In this area, LAOs may be able to play a more countries of over-reliance on institutional care, proactive role in promoting access for the rural which is both costly and generally not preferred 21 HelpAge International (2015b). 22 See World Bank (2015) for more detailed discussion of recommendations on healthcare and the elderly. 23 With a time bank, the younger elderly provide care to older elderly. The time provided is “banked” and they have a credit for future care to be provided when they are older elderly. 72 June 2016 | Thailand Economic Monitor by older people themselves. A key decision in the industries such as tourism and financial services process of strategy formulation will be who is where Thailand has potential with both domestic prioritized for public subsidies. While the poor and global older people to expand its markets elderly should be a priority, it is important also and capture their growing share of consumption. to prioritize on the basis of degree of disability. This is an area of policy where there is potential for Thailand to benefit from the progress being made by China in policy formulation and to learn from neighbors such as Korea which have more developed long-term care systems. (iv) Opportunities from aging: Thailand has the opportunity to benefit from rapid aging across Asia and the world, including in rich countries. Older people across the region are a new and expanding class of global consumers, and offer commercial opportunities in areas where Thailand has demonstrated comparative advantage. Medical tourism for example is already a growing sector and there are big opportunities to expand the market in the face of rapid growth in older populations in large neighboring countries, costs pressures on public funding and household budgets in those countries, and the combination of quality and affordability that Thailand offers in health services. 24 Similarly, the burgeoning market in Thailand for retirees from abroad to relocate has significant upside potential as the number of retirees around the region explodes. More broadly, there are a range of service 24 Results from the Medical Tourism Patient Surveys (various years) carried out by the Medical Tourism Association indicate that the large majority of patients are already over 50 years of age. http://www.medicaltourismassociation.com/en/research-and-surveys.html 73 Thailand Economic Monitor | June 2016 C. Conclusion While aging poses real challenges for Thailand, it is important to realize t a third is to continue reforms of that policy and behavioral responses to formal sector pension schemes to make promote health and productive aging them more financially sustainable and, are available. Undoubtedly aging poses new in doing so, create fiscal space for deeper challenges for Thailand in sustaining growth, policy efforts to expand coverage of the managing public finances, and supporting living pension system. standards. The reform agenda related to aging may seem daunting, but the key elements are t a fourth area is developing a ones where there is considerable international sustainable financing model for aged and regional experience from which to learn. and long-term care which leverages the In terms of prioritizing age-related reforms in strengths of informal care networks and Thailand, a few areas stand out: promotes a model of care built around home- and community-based care t the first is the importance of provision. stimulating household savings for old age, both to promote improved elderly None of the priorities above are and household welfare and as a future intended to detract from the need for source of investment and economic continued comprehensive efforts, including growth. in areas not covered in this note such as promoting age-friendly cities, more immigration of young t a second is encouraging female labor people to Thailand, expanded research on the force participation, particularly among situation and potential of older people, and other urban women, through attitudinal and measures. Thailand’s government, employers policy change in the labor market but also and workers, and families have the opportunity increased public support for childcare to to take a comprehensive approach to managing help balance work and family life and rapid aging and achieve healthy and productive also help to stem declining fertility rates. aging. In this way, Thai society as a whole can become the architect of its own destiny. 74