Until recently the country’s strategy of export-oriented growth was defended on the grounds that it delivered growth. But as Thailand’s growth rate has faltered, that argument has lost traction. More people than ever fear that Thailand faces a ‘middle-income trap’, and the issues of growth and inequality have been yoked together. The question now is, how can Thailand sustain growth and mitigate inequality at the same time?

Thailand has become a middle-income country. Its GDP per capita in real terms has tripled in one generation from 1980 to 2005. In 2009 Thailand’s GDP per capita at current prices was about US$4000. The proportion of its population left in poverty has dwindled to around 7 per cent. But income inequality grew markedly worse over the boom years of the 1980s and 1990s, and remains high. The gini coefficient in recent years has hovered around 0.5 to 0.52, one of the highest rates outside Africa and Latin America. By contrast, neighbouring countries such as Malaysia, Indonesia and the Philippines have shown trends toward greater equality. New data on the distribution of wealth in Thailand show even greater disparity, with a gini coefficient around 0.7.

The main reason behind Thailand’s inequality is the huge income gap between those few people with good jobs in the modern economy and the vast majority still stuck in the low-productivity sectors of agriculture and informal work. Manufacturing now contributes 85 per cent of total exports, but employs only about 10 per cent of the workforce — and well-paid, white-collar jobs employ only around 15 per cent. Conversely, agriculture contributes less than 10 per cent of GDP but still employs around two-fifths of the population. Another quarter is stuck in Thailand’s growing informal sector, including vending, small business, personal services and casual labour. Altogether, those with insecure livelihoods comprise about two-thirds of the total population of Thailand today.

Economists have tried to explain Thailand’s extraordinarily high inequality in two ways. First, they point to the country’s development strategy. Thai governments have relied heavily on exports, first of agriculture, later of manufactures, to sustain growth. They have attracted multinational companies that have brought in capital-intensive methods which require relatively little labour, keeping wages down in order to compete against other countries pursuing the same strategy. There has been little attempt to improve labour productivity or technical competence.

Second, analysts point to the low level and poor distribution of public goods, including physical infrastructure, education and social services. Education is a clear example. Until recently, it was difficult for the majority of children to progress beyond the primary level, while the minority in tertiary education enjoyed quite high subsidies. Across the range of public goods, much more was invested in Bangkok than in Thailand’s outlying rural areas.

The fundamental reason for the low level of public goods is a low level of taxation. In Thailand, the ratio of tax to GDP is around 17 per cent. In many other middle-income countries with similar levels of development, the ratio is much higher: 25 per cent in Venezuela and 32 per cent in Turkey. Taxation is not only low, but it may also add marginally to inequality by weighing more heavily on the poor than the rich.

One result of limited government spending is the low level of education among the Thai labour force. In 2009, 57 per cent of employed workers had only elementary education or less. The share of those in secondary and tertiary education was 28 per cent and 8 per cent, respectively. This low education level makes it difficult for Thailand to climb the ladder to higher-tech production systems. Late industrialisers are now catching up with Thailand, while more-advanced industrialisers are leaving her behind.

Thai governments have routinely said that they intend to tackle inequality — but are yet to do anything substantial. In the last few years, however, there has been a significant change in tone. Improving equality has risen to the top of the political agenda, and has been linked with the broader issue of escaping the middle-income trap. Two trends have brought this about. First, it is widely agreed that the political conflict of recent years is linked to inequality. Second, Thailand’s growth rate has declined since the 1997 financial crisis, at a time when many Asian neighbours have performed better. Moreover, the faltering of Western economies has led to a general realisation that reliance on export-oriented growth will no longer work. The new mantra is to boost domestic demand.

To get out of the middle-income trap and to reduce economic inequality, Thailand needs to increase government spending on education, research and development, infrastructure, and other public amenities and services. How to raise the money for this? Thailand’s low level of taxation to GDP reflects the long-term reluctance of successive governments to raise taxation. Even today, Thai businesses complain about higher rates of corporate tax than in neighbouring countries, and the salary-earning middle classes complain that they bear the brunt of ‘populist’ policies.

A first step would be expanding the efficiency of tax collection within the existing tax structure. The personal-income tax system has many exemptions which are manipulated to reduce liability. Huge numbers of businesses escape any taxation by simple accounting ruses. A World Bank and Bank of Thailand study showed that better collection alone could increase tax revenue by as much as 5 per cent of GDP.

Another study found that Thailand could increase its tax revenue further with simple tax reforms. Currently, property taxes yield only 0.2 per cent of GDP. The Abhisit Vejjajiva government proposed a tax on land and buildings which would have raised another 1.25 per cent of GDP, but the proposal was scrapped in the run-up to the July election. Raising value-added tax to 10 per cent from the present low rate of 7 per cent would increase revenue by another 1.25 per cent of GDP. Other possibilities include a net wealth tax, capital gains tax and environment tax.

The issues of inequality and boosting domestic demand are now on the political agenda, and there are clear examples of successful reform packages operating in neighbouring countries. The question now is whether the political will exists to tackle the problem.

Pasuk Phongpaichit is Distinguished Research Professor at Chulalongkorn University and is a Visiting Professor at Kyoto University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Where is Thailand Headed?‘