Adverse Trends in Total Factor Productivity

In part, the increasing limitations on growth imposed by the EAEM manifest themselves in the observed trends in the country's total factor productivity (TFP). TFP measures the efficiency of a given set of input factors, capital and labor in generating output. Alternatively it can be thought of as the level of technological development in the economy —a given amount of factor input will generate more or less output depending on the country's technological capacity. TFP is a critical variable for sustaining long-term growth because unlike increments of capital and labor it is not subject to diminishing returns.

In its assessment of the trends of TFP in Thailand, the IMF[18] found that the high rates of growth in the pre-1997 period were driven by capital accumulation, rather than TFP growth. Even more significantly, IMF estimates show that TFP growth slowed during the 1990s. This finding is similar to that of other researchers.

These patterns no doubt account for the fact that in terms of the overall competitiveness of its products, Thailand lags behind several of its East Asian competitors: Singapore, Hong Kong, Taiwan, Korea and Malaysia, with China quickly closing the gap. It should be noted that Thailand did improve its competitiveness during the first two years (2001-02) of the Thaksin administration.

Given likely demographic and investment patterns in the country, the IMF concluded that medium-term economic growth in Thailand will have to be driven by TFP growth rather than accumulation of capital and labor. This shift in the country's growth mechanism represents a sharp contrast with the pre-1997 growth pattern driven largely by capital accumulation.

The need for TFP-led output growth underscores the importance of maintaining an environment that is conducive to efficiency gains and technological development. It is in this light that Thaksinomics will be examined below—is this new approach to development in Thailand likely to succeed in creating the necessary conditions for expanded productivity and growth?