The committee recognizes that, in the current environment where growth prospects differ wildly across regions and monetary policy in advanced economies remains ultra-loose, pressure from capital inflows may persist in the medium term. All available policy options are therefore open to considerations. Substantial preparation work has been ongoing to ensure that the right measures can be readily implemented should the situation warrant. Investors seeking long-term presence in Thailand should be reassured that productive capital inflows are still highly valued, and any introduction of measures will be carefully designed to minimize unintended consequences. After all, the goals of these measures are to preserve the financial and economic integrity, the very reason that attracts investors to Thailand in the first place. Structural Impediments Ladies and gentlemen, Macroeconomic stabilization and demand management policy can only get us so far. The ultimate determinants of long-term growth are tied to the supply side of the economy, namely the deployment of effective capital and labour inputs. It is a pity that the supply-side issues are often overlooked in policy discussion, and action is often limited to structural ‘reform’ that comes too late. By addressing the structural issues early and preemptively, the long-run growth benefits are likely to be more substantial. So let me venture out of my familiar territory, and devote the rest of my talk to discuss one key structural issue facing the Thai economy – the labour shortage. Unemployment is persistently low in Thailand, and is not very sensitive to the business cycles.

One underlying cause is the low labour force, which limits the supply of workers. The total size of workforce may further decline with the secular demographic trend, an important issue I will come back to in a moment. But the low degree of cyclicality of unemployment suggests that there may be factors keeping the labour market tight other than demand pressure. Through our business contact and recent surveys, the labour shortage has repeatedly come up as one of the top concerns, alongside competitiveness and production costs among others, yet pressure on wages is largely absent. What labour market imperfections are responsible for the structural shortage of labour supply, or equivalently, persistent excess demand for labour? A long standing issue is that of education and skills mismatch. The manufacturing industry, for example, often reports difficulties in hiring workers with vocational training, which is in shorter supply relative to university graduates. There are also reports of under-supply of graduates in science, relative to social science. One reason may be the firms’ reluctance to adjust wage upwards, resulting in shortage of supply at the going wage. This reluctance, in turn, may be caused by low marginal productivity of labour, which is a consequence of subdued capital formation over the years, resulting in low capital-to-labour ratio. Escaping this vicious cycle of low wage and labour shortage, involves an improvement in labour productivity via higher investment in physical capital. Several strategies have been proposed.