What Makes Indonesia and Thailand So Difficult to Become Developed Countries?
Whilst many traditional theories in economics, such as Robert Solows’ (1956) Growth Model, predict that over time developed countries will converge to the growth levels of developed nations, this has not yet been the case. Growth and development in Thailand and Indonesia has been lagging way behind the levels of most developing nations, with total output growth being dismal. Why is this?
Firstly these countries have a smaller population and smaller landmass in comparison, and so it is near impossible to reach the economic size of nations such as America. Developed countries are more able to gain from economies of scale and their firms have an established market power, creating large barriers to entry for many markets. Yet countries such as Singapore have developed much faster than Thailand and Indonesia, despite their small size. Some claim these countries find it difficult to develop as their economies are not as open as developed countries, with more protectionist policies in place to protect inefficient domestic industries. This may give less incentive to compete and cost minimize.
An alternative reason is due to Indonesia and Thailand having huge amounts of natural resources, which are attractive for entrepreneurs to gain quick, easy money from. These countries thus focus their productive efforts mainly on primary good productions, which have very little added value and profit margins (such as mining and deforestation). In contrast, already developed countries (such as the UK and US) invest heavily into high-tech and service industries, which has a higher mark-up price and thus brings higher profits. In order for Indonesia and Thailand to compete in such industries they must have a skilled and educated workforce. However, since their education and training systems in these nations are not as effective as the established institutions in developed nations, their workforce are better suited towards unskilled, labor intensive industries. Furthermore, the few skilled and educated individuals that do come from Thailand and Indonesia will likely migrate to the developed nations, due to better job opportunities and wage levels. This problem, often referred to as the ‘new international division of labour’ by authors such as Warf (2010) and Mimiko (2012), is said to have lead to the spatial shift of manufacturing industries from advanced capitalist countries to developing nations, such as Thailand and Indonesia (e.g. in search of cheap labour costs).
One reason why these countries find it difficult to develop is because the already developed countries have a competitive advantage in the sense that they have a higher technological sophistication. Whilst there may be spillover effects, with foreign technologies crossing borders into Thailand and Indonesia, their capability for utilizing foreign technologies is lower and their populations are less technologically educated. Additionally, many technologies are capital intensive, of which these countries posses less of than developed countries. Vernengo (2004), speaking from a dependency theorists’ perspective, claims that in addition to technological differences, these counties are unable to converge to the level of developed nations due to the stark differences in financial strength. In addition, since their currencies are less stable, they are unlikely to be able to borrow funds in their domestic currency and so their financial security depends heavily on domestic and foreign exchange rates. This is less of a problem in developed nations and allows for easier financing of investments, and thus higher growth. Their health, housing and education problems are more profound than most developed countries, and so a lower proportion of their financial income can be spent on alternative investments. These countries also have a larger shadow economy, and so not all income is recorded and reinvested. Finally, Thailand and Indonesia have much higher levels of political instability, which creates uncertainty in the economic and acts as a disincentive for investment.
Mimiko, O., 2012. Globalization: The Politics of Global Economic Relations and International Business. Durham, N.C.: Carolina Academic.
Warf, B., 2010. New International Division of Labor. Sage Publications
Vernengo, M., 2004. Technology, Finance and Dependency: Latin American Radical Political Economy in Retrospect. University of Utah: Department of Economics, Working Paper No: 2004-6. [online]. Available from: http://www.economia.unam.mx/cegademex/DOCS/matias_vernengo1. [last accessed 14.06.16].
Solow, R., 1956. A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70, (1), 65-94. [online]. Available from: http://www.econ.nyu.edu/user/debraj/Courses/Readings/Solow. [last accessed 14.06.16].