Thailand risks growing old before it gets rich

BANGKOK Wed Mar 2, 2011 12:14pm GMT

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BANGKOK (Reuters) - Earning $6 (3.7 pounds) a day from her food stall outside her home next to a railway track, Lumyai Rungruang is sceptical of news that Thailand's wages are rising. The 54-year-old is too busy contending with spiralling inflation.

Coconut juice has doubled in price. Egg prices are up 50 percent at 90 baht (2 pounds) a dozen. Doubtful her income can keep pace, she bristles when pressed about her future.

"I expect to work the rest of my life," the mother of five said from her makeshift stall with its corrugated iron roof and bamboo stools, where she sells rice porridge and noodles.

For the past decade, Thailand's minimum wage has trailed inflation, creating one of the widest gaps between rich and poor in Asia according to the World Bank, and fuelling working-class frustrations that erupted into violent street protests last year.

But Thai wages are creeping up, supported by an average 6.4 percent minimum-wage increase this year, rising agricultural prices that have helped farmers, a shortage of skilled workers and a planned increase in civil-servant salaries from April.

While higher incomes could boost Prime Minister Abhisit Vejjajiva's chances at polls this year and prod consumer spending, they raise questions over whether Thailand's economy, Southeast Asia's second biggest, can keep its cost advantage over Asian rivals -- from China to Malaysia and India.

They also highlight another troubling question facing the Thai government and millions of workers like Lumyai: will Thailand grow old before it grows rich, as its population of 67 million people ages at one of the fastest rates in Asia?

"What I worry about is our labour market," said Atchana Waiquamdee, deputy governor of the Bank of Thailand.

"We may not be able to compete with the low-wage countries emerging every day such as Vietnam. But we need more of a middle class, otherwise we cannot avoid social problems and the struggle between the lower- and high-income classes."

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Chart on Asia factory workers wages: link.reuters.com/nun38r

Chart on Thailand's aging population: link.reuters.com/pun38r

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TWO-TIER LABOUR MARKET

Atchana, in an interview with Reuters, said Thailand would pursue a two-tier approach to wages, keeping pay low for unskilled labourers -- a pool buttressed by millions of migrants from neighbouring Myanmar -- while lifting skilled wages.

"We do not have enough semi-skilled and skilled labour," Atchana said. "I think we are going to see higher wages for these two types of labour, although the growth rate in the minimum wage may not be as high because of the supply of unskilled labour."

While unskilled workers may struggle to keep pace with living costs, those with slightly better resumes -- mechanics, assembly-line workers -- are in a strong position to bargain. Unemployment is low at just 1.2 percent.

Thailand, a base for automakers including General Motors Co (GM.N), saw a shortage of as many as 100,000 manufacturing workers last year, the World Bank said.

A rise in wages complicates Thailand's efforts to reverse a decline in foreign direct investment applications, which fell 33 percent to $7.7 billion last year as protesters occupied Bangkok streets. Flows into neighbouring Malaysia more than tripled.

It also threatens Thailand's cost advantage. An average factory worker in Thailand earned $263 per month, cheaper than India's $269 or Malaysia's $298 and China's $303, according to a 2010 survey by the Japan External Trade Organisation.

Manufacturers have plenty of options, including increasingly Vietnam, where the average factory wage is less than half of Thailand's at $107. Factory wages in the Philippines and Indonesia are also below Thailand's.

COURTING THE POOR

Powerful forces are at work that could support wages for some time -- from pressure to allay a potentially violent anti-government "red shirt" protest movement drawn from the rural and urban poor to Thailand's ageing workforce.

Thailand's 46-year-old prime minister is aggressively courting low-income voters, whose frustrations helped fuel red shirt protests last year in which 91 people were killed.

The richest 20 percent of Thailand's population earn about 55 percent of the income while the poorest fifth get 4 percent, among Asia's widest income disparities, says the World Bank.

Abhisit, facing a close election expected mid-year, said this week he would raise the daily minimum wage by 25 percent over the next two years if his Democrat Party was elected, a break from the past when wages barely kept pace with inflation.

According to Thailand's Labour Ministry, there were only two years in the past decade when the increase in minimum wage exceeded inflation: in 2001 when inflation was 1.6 percent and the increase was 2.2 percent and 2007 when inflation was 2.3 percent and the wage rose 3.1 percent.

To win over red-shirt supporters, Abhisit, an Oxford University-educated economist, has announced a slate of populist economic policies -- from subsidised oil prices via a state oil fund to more financial support for the elderly, an expansion of social security and more low-cost loans for the poor.

Similar measures helped the party of his rival, former premier Thaksin Shinawatra, win enough support in the vote-rich north and northeast of the country to become the first in Thai history to serve a full term and then get re-elected.

Thaksin, an ethnic-Chinese telecoms tycoon was later removed in a 2006 coup and convicted in absentia of corruption. He now lives abroad to avoid jail.

GROWING OLD BEFORE RICH

But politics are not the only factor driving wage inflation.

Bank of America Merrill Lynch economists say Thailand is at risk of becoming old before it gets rich, based on projections of per capita wealth and how fast the population is ageing.

That puts intense pressure on Thailand's policymakers to accelerate efforts to expand the middle class. Thailand has very little in the way of formal safety nets such as retirement pensions. The government's 500 baht monthly stipend for the elderly, unveiled last year, is seen as far too little.

Per capita income in Thailand was $8,232 in 2008 on a purchasing power parity basis, the Bank of America economists said. By 2015, that is expected to reach $11,399 -- well short of Singapore's $67,061, Hong Kong's $57,963 and Taiwan's $24,759.

By 2030, Thailand, Vietnam, Malaysia, Indonesia, China and the Philippines still won't be in Asia's rich club of nations. But Thailand and China are the only two that will be both poor and old, the economists said.

Other data reinforce that view. Gains in health services and contraception have pushed Thailand's fertility rate from a peak of 6.8 percent in 1965 to 1.8 percent -- below the replacement level of 2 percent where a death is matched by a birth.

And Thais aged 65 or older are expected to nearly triple by 2050 to 23 percent of the population, according to the Asian Development Bank.

That should help Thailand's services sector, which now contributes about 40 percent to the economy, to grow to about 50 percent, said economists at Tisco Securities.

"Thai people are getting a bit richer, and with this trend we can expect a better quality of life, so the growth in the services sector should be more than before," said Capital Nomura Securities economist Nuchjarin Panarode.

But as the population ages, a Social Security Fund that provides benefits for members such as sick pay and pensions will face enormous strains. The head of the Bank of Thailand's Monetary Policy Strategy Division warned last year it would run dry within 40 years.

"The pension money is not enough for Thai people," said Nuchjarin. (Additional reporting by Ambika Ahuja and Orathai Sriring; Editing by Alan Raybould and Vidya Ranganathan)

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