Improving investment climate important to boost economic growth in Thailand

The investment climate is the fundamental socio-economic framework in which firms operate – the macroeconomic and trade policies they face, the labor and financial markets in which they recruit and raise money, the available infrastructure and imposed regulations, as well as all other areas of public policy impacting on private business.

In Thailand, the uncertain political situation since 2006 has negatively affected the country’s economy. The Productivity and Investment Climate Survey, which was fielded in 2007 at a time of great political instability and policy uncertainty, clearly reflected the pessimistic views of business managers. One interesting finding of the recently released Thailand Investment Climate Assessment Update is that instability and economic policy uncertainty became major issues – firms that perceived it a major or severe obstacle doubled from one-third in 2004 to two-thirds in 2007.

The negative changes in the investment climate were to some extent magnified by this somber entrepreneurial mood, while the improvements often went unnoticed. Improving political stability and economic policy certainty is a prerequisite for other investment climate reforms to have a positive effect.

I think if company managers are not confident that the current environment is favorable to business, they will postpone their decisions. The pessimistic business sentiment resulted in a sharp decline of private investment growth, from 10.6 percent in 2005 to 3.7 percent in 2006 and 0.5 percent in 2007.

Shortages and mismatches of skilled labor and inadequacies in the technological innovation system also limited the ability of Thai firms to increase productivity. Many job vacancies arise because applicants lack both basic and technical skills required by firms; and there is high staff turnover due to intense competition among firms for qualified labor. Two-fifths of firms responded that shortage of skilled labor was one of their three biggest constraints. The insufficient supply of qualified staff in Thai enterprises has dire consequences: not only does it immediately lower their productivity, but it also limits their capacity and willingness to invest in training in the long run, which tends to perpetuate the vicious circle.

Limited access to finance, unreliable infrastructure, and burdensome business regulations – similar concerns as in a 2004 survey – are also some of the factors affecting business and investment decisions in Thailand.

In Thailand, as well as in many other countries, improving business environment often associates with improving investment as well as productivity. An improvement in the overall investment climate does not require all constraints to be removed at the same time and the government has the possibility of sequencing reforms and public investments, depending on its policy priorities.